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Annual Report 2010

Plain-text annual report

Annual Report 2010 S I R I U S I N T E R N A T I O N A L I N S U R A N C E C O R P O R A T I O N A N N U A L R E P O R T 2 0 1 0 1 Annual Report 2010 Contents White Mountains Insurance Group Comments from the President and CEO Board of Directors’ Report Income Statement - Group Statement of Comprehensive Income - Group Balance Sheet - Group Change in Shareholders’ Equity - Group Cash flow Statement - Group Income Statement – Parent Company Statement of Comprehensive Income – Parent Company Balance Sheet – Parent Company Change in Shareholders’ Equity – Parent Company Cash flow Statement – Parent Company Performance Analysis – Parent company Note 1 Accounting principles Note 2 Information on risks Note 3 Premium income Note 4 Claims incurred, for own account Note 5 Operating costs Note 6 Investment income Note 7 Unrealised gains on investments Note 8 Investment expenses and charges Note 9 Unrealised losses on investments Note 10 Net profit or net loss per category of financial instruments Note 11 Taxes Note 12 Intangible assets Note 13 Land and buildings Note 14 Shares and participations in group companies Note 15 Shares and participations in associated companies Note 16 Investments in shares and participations Note 17 Bonds and other interest-bearing securities Note 18 Derivatives Note 19 Other debtors Note 20 Categories of financial assets and liabilities and their fair value Note 21 Tangible assets Note 22 Deferred acquisition costs Note 23 Untaxed reserves Note 24 Provisions for unearned premiums and unexpired risks Note 25 Claims outstanding Note 26 Equalisation provision Note 27 Claims handling provision Note 28 Employee benefits Note 29 Other creditors Note 30 Contingent liabilities and commitments Note 31 Associated parties Note 32 Average number of employees, salaries and other remunerations Note 33 Fees and reimbursements to auditors Note 34 Operational leasing Note 35 Class analysis Note 36 Transition to IFRS Audit Report Definitions History 1 2 5 12 13 14 16 18 20 21 22 24 26 27 28 35 45 45 47 47 48 48 48 49 50 51 52 52 54 54 55 55 56 56 60 60 60 61 62 62 63 63 66 66 66 67 70 70 70 71 74 75 77 2 Annual Report 2010 White Mountains – our owners White Mountains Insurance Group, Ltd. White Mountains Re Ltd. is a financial services holding company with White Mountains Re Ltd. (White Mountains primary business interests in property and Re) – is a Bermuda-domiciled holding casualty insurance and reinsurance. The Com- company whose operating companies pany’s corporate headquarters and its regis- offer capacity for property, accident & tered office are located in Hamilton, Bermuda, health, aviation, trade credit, marine and and its principal executive office is located in other exposures. Hanover, New Hampshire. Our principal operating companies are: The Company conducts its principal busi- Sirius International Insurance Corporation nesses through: (WMRe Sirius) – a Sweden-based international White Mountains Re – global reinsurance. reinsurer that focuses mainly on property OneBeacon – specialty insurance. OneBea- and other short-tailed lines. WMRe Sirius is con’s common shares are listed on the New the largest reinsurance company in Scandina- York Stock Exchange under the symbol “OB”. via and a leading reinsurer in Europe. WMRe White Mountains owns 76% of OneBeacon. Sirius’ home office is in Stockholm, and it Esurance & AFI – personal auto insurance has branch offices in Australia, Bermuda, directly marketed and underwritten on the Copenhagen, Hamburg, Labuan, Liège, Lon- internet and through call centers. don, Singapore and Zürich. White Mountains Advisors – investment White Mountains Reinsurance Company of management with $32 billion of assets under America (WMRe America) – a U.S.-based management. international multi-line reinsurance com- White Mountains’ common shares are listed pany that employs a conservative strategy on the New York Stock Exchange and the with specialized underwriting expertise and Bermuda Stock Exchange under the symbol strong operational discipline. WMRe Ameri- “WTM”. Market capitalization as of December ca’s home office is in New York with branch 31, 2010 was (“ABVPS”) $2.8 billion. As of offices in Connecticut, Miami and Toronto. December 31, 2010, White Mountains reported White Mountains Specialty Underwriting,Inc. total assets of $14.5 billion, adjusted share- (DBA White Mountains Re Solutions) – a holders’ equity NGM of $3.6 billion, and adjusted Connecticut-based professional team special- book value per share NGM of $441. izing in opportunistic structured acquisitions of run-off property and casualty insurance liabilities. White Mountains Re Solutions further enhances transaction returns via ef- fective post-acquisition management of the run-off process. 3 Annual Report 2010 Comments from the President and CEO In the previous annual report I indicated million people homeless and continues to that 2010 would be a challenging year, cause tremendous suffering. The second, not least because it had started with a in Chile the following month, killed around high level of natural catastrophes. I re- 500 people but was much bigger in terms mained optimistic, however, that the qual- of cost to the insurance and reinsurance in- ity of our underwriting and the spread dustries. For Sirius International, it became of our portfolio would hold us in good the second largest net loss in our history at stead. $80 million. Claims experience for the reinsurance There were several other catastrophes industry in 2010 did indeed prove to be in the first half of the year. European wind- much higher than average but, despite a storm Xynthia in western Europe, although string of substantial losses, Sirius Interna- not as big as originally feared, had a size- tional turned in another set of excellent able financial impact, as did the flooding results. Our combined ratio of 89% was in Poland, Czech Republic and Slovakia. virtually unchanged on 2009, maintaining The most publicised disaster of the year our record of stability. was, however, man-made. The implications The year began with two big earth- of the Deepwater Horizon blow-out will quakes. The first, in Haiti in January, took reverberate for years to come and go well at least 250,000 lives, left more than a beyond our industry. Sirius International’s 4 Annual Report 2010 exposure was relatively modest in the pecially out of the USA and Brazil. Else- scale of things, but is still likely to be in where, I was pleased with the progress of $10-15 million range. all our offices and classes, though Marine Fortunately the second half of the did experience above-average losses. year was mostly free of major catastro- Apart from our usual preoccupa- phes, despite the earthquake in New tion with serving our customers, another Zealand and events in Australia. At the priority has been the need to prepare for time of writing we are still assessing the Solvency II. Sirius has more than enough effects of the flooding and cyclone in solvency capital to meet the new regu- Queensland, but our exposure is likely to latory requirements but, as the whole be relatively modest. We also anticipate European industry is experiencing, the a significant level of claims as a result of administrative and compliance demands the exceptionally cold winter in Scandi- are burdensome. I am happy to report navia. that our preparations are on schedule, The fact that we were able to main- and we will submit an internal model for tain our excellent levels of profitability approval by the Swedish regulator. at a time of substantial losses and highly Looking ahead to 2011, there is no competitive market conditions under- doubt that it will be challenging for the lines the stability we are able to offer reinsurance industry as a whole. our customers. Our average combined A quarter of the way through the year, ratio for the past seven years has been and we have already seen some excep- 89%. Over the past fifteen years, a period tional natural catastrophes. Most notably, that includes the events of September 11, the New Zealand earthquake in January 2001 and the 2005 hurricane season, it was followed by the Japanese earthquake has been 94%. This exceptional degree and tsunami, an event that is certain to of resilience helps to explain why we are be among our highest-ever losses, though able to provide a safe haven for the busi- still not the biggest we have experienced. ness of any ceding company. These events came after a flat renewal At Sirius, we do not believe in season, with conditions overall soften- change for change’s sake, nor will we ing a bit despite hardening in one or two expand just to gain market share when areas, most notably Chilean earthquake conditions dictate a more cautious strat- covers. As ever, I maintain the utmost egy. 2010 saw little in the way of new confidence in our underwriting teams to announcements, and our premium income handle these challenges professionally remained broadly flat. One significant within a robust risk management frame- change from 2009 was in the Credit and work. I thank all the staff at Sirius Inter- Bond area where the financial crisis had national for their dedication, and look created space in the market. Our writing forward to being of continued service to of this type of business through the Liège our customers and brokers throughout office increased many-fold, most of it for 2011 and beyond. European customers. Our Accident and Health portfolio had another excellent year and also enjoyed steady growth, es- g ö r a n t h o r s t e n s s o n p r e s i d e n t & c e o 5 Annual Report 2010 At a glance 2010 2009 Net premium income $778 million $911 million Claims net of reinsurance $475 million $545 million Underwriting profit $116 million $172 million Combined Ratio 89% 86% Investment income $12 million $30 million Income before tax (group) $150 million $207 million Combined Ratio (Parent Company) 80% 88% 87% 86% 89% 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 Solvency Capital (Group), MSEK 9 893 10 399 10 455 12 544 12 516 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 6 Annual Report 2010 Board of Directors’ Report Sirius International Insurance Corporation across Western Europe between 27 and 28 (publ) February. At the end of April, Deepwater Cor porate Identity Number: 516401-8136 Horizon’s drilling rig in the Mexican Gulf sank. The resulting oil spill is considered The Board of Directors and the President to be the largest ever environmental di- of Sirius International Insurance Corpora- saster in the USA. During May, the central tion (publ) (Sirius International) hereby and eastern parts of Europe were affec- submit the company’s annual report for ted by floods. On 4 September, a further 2010. General information concerning the company powerful earthquake struck, this time in New Zealand, with similar comprehensive material damage, primarily in the town of Christchurch. There were also a number of Sirius International is active in interna- aviation claims during the year. During the tional insurance and reinsurance. Sirius final weeks of December, Queensland in International was established in 1989. Australia was affected by significant floo- Insurance operations commenced in 1945 ding after a prolonged period of rain. The in Försäkringsaktiebolaget Sirius. In 1989, floods in Australia did not, however, have the reinsurance activities were transferred any more than a small effect on net profit to Sirius International. Sirius International for the year. has been the Parent Company of the Sirius Thanks to a strong earnings trend during Group since 1992. the second half of the year, the company can, despite the increased claims, report a The development, results and position of very satisfactory result from the insurance the company operations, with a combined ratio of 89%. 2010 was significantly more affected than With the inclusion of 2010, Sirius Interna- both 2008 and 2009 as regards natural tional has experienced a combined ratio disasters and other large damaging events. below 100% for nine consecutive years. This applies for Sirius International and the In general, price levels were satisfactory entire reinsurance industry. As a compa- in the majority of markets and classes of rison, it can be stated that the company’s business. The run-off results were positive 10 largest claims during 2010 cost the for earlier years. company more than twice as much com- Gross premium income for the Group pared with 2009. The larger claims during amounted to MSEK 7,395 (MSEK 8,630) and the year can be summarized as follows: a MSEK 7,395 (MSEK 8,630) for the Parent powerful earthquake struck 100 km from Company. Premium income for own ac- the coast of Chile on 27 February. The count for the Group totalled MSEK 5,608 earthquake, which is the largest to have hit (MSEK 6,957) and for the Parent Company Chile in fifty years, measured 8.8 on the MSEK 5,608 (MSEK 6,957). The insurance Richter scale and caused comprehensive operating results of the Group amounted to material damage. Hurricane Xynthia swept MSEK 838 (MSEK 1,317) and for the Parent 7 Annual Report 2010 Company MSEK 839 (MSEK 1,311). currencies, resulted in realised and unrea- It is worth noting that all branch offices, lised foreign exchange rate losses. Fo- with the exception of the branch office in reign exchange rate losses have negatively Copenhagen, which is currently undergo- impacted the yield measured in Swedish ing a build-up phase, report a combined krona. From 1 January, 2010, the Parent ratio under 100% for all insurance catego- Company has hedged approximately thirty ries, with the exception of assumed Marine percent of its USD exposure, including the reinsurance, which was affected by the exposure stemming from subsidiaries and Deepwater Horizon disaster. The combined associated companies. ratio amounted to 89% (86%) for the Group The investment results, as presented and 89% (86%) for the parent company. Re- in the Income Statement of the Group, turn on capital employed in the insurance amounted to a profit of MSEK 449 (MSEK operations amounted to 16%. 658) including foreign currency exchange The financial markets have continued to losses but before allocation of interest to recover during the year. The stock mar- the insurance operations. Investment yield kets in Sweden and the USA saw stable amounted to 2.6% (2.4%) and total yield improvements, with the Swedish OMX 30 amounted to 0.9% (3.3%). Calculation of increasing by 21.4% and the S&P 500 in the investment yield and total yield is made in USA increasing by 12.8%. The major stock accordance with the recommendations of markets in Europe display a more varied the Swedish Financial Supervisory Autho- pattern, with growth of between 9-16% rity. in England and Germany, while the stock The investment portfolio’s focus and markets in France and Switzerland declined composition is largely unchanged com- slightly. Interest rates on government secu- pared with the previous year, however, rities remained low, despite rate increases the portion of bank funds and short-term on both short and long durations during investments in the portfolio has been re- the second half of the year. The Swedish duced and reinvested in interest-bearing interest rates generally lie at a higher investments with somewhat longer invest- level compared to the USA and the rest of ment horizons. At the end of the year, the Europe. The credit spreads compared with investment portfolio was composed of: the risk-free interest rates have continued shares and participations, 12%; investments to decrease during the year. in associated companies, 12%; and interest- All in all, the yield on the bond portfo- bearing investments and bank funds, 76%. lios amounted to 2.5%, excluding foreign Other events regarding changes in the exchange rate effects. For the equity port- Group’s structure are described primarily folio, including investments in associated under the section “Ownership”. companies and private equity companies, the yield amounted to 9.4%, excluding Ownership foreign exchange rate effects. As a result of Sirius International is a wholly owned sub- the continued strengthening of the Swedish sidiary of Sirius Insurance Holding Sweden krona of 6.2% versus the USD and 14.2% AB (Corporate Identity Number 556635- versus the EUR, the company’s continued 9724), Stockholm, Sweden, which is ultima- policy, regarding the exposure versus these tely owned by White Mountains Insurance 8 Annual Report 2010 Group Ltd, Bermuda. Sirius Belgium Réassurances S.A.(in liqui- In February 2010, Sirius International ac- dation), Liège, Belgium, was commenced as quired all of the shares in White Mountains the company is no longer in active opera- Re Bermuda Ltd, Bermuda. tion. The liquidation has not been comple- At year-end 2010, the Group consists ted, due to a tax dispute. of the Parent Company Sirius Internatio- nal Insurance Corporation (publ) with the Major events occurring during the financial subsidiaries Sirius Belgium Réassurances year or after the closing day S.A. (in liquidation), Liège, Belgium, Sirius As a part of the continued restructuring Rückversicherungs Service GmbH, Hamburg, work within the Group, Sirius Internatio- Germany, Sirius International Holdings (NL) nal has, on 4 February, 2010, in an intra- BV, Amsterdam, The Netherlands and White Group transfer within the White Mountains Mountains Re Bermuda Ltd, Hamilton, Ber- Group, acquired all of the shares in White muda. Mountains Re Bermuda Ltd for a purchase In addition, Sirius International has eight price equivalent to USD 100 million. Since branch offices outside of Sweden. These September 2009, the company has been in include the branch office in London, Great run-off, as operations were transferred to Britain - Sirius International Insurance the then newly-opened branch in Ber- Corporation (publ) UK Branch; the branch muda. After approval from the authorities office in Zürich, Switzerland - Sirius In- in Bermuda, a reduction, and subsequent ternational Insurance Corporation (publ), repayment, of the company’s sharehol- Stockholm, Zürich Branch; the branch office ders’ equity was carried out during the in Singapore - Sirius International Insurance fourth quarter. Following this reduction the Corporation (publ) Asia Branch, Singapore; company’s shareholders’ equity amounts to the branch office in Labuan, Malaysia – MUSD 5. Sirius aims at liquidating White Sirius International Insurance Corporation Mountains Re Bermuda Ltd and its subsi- (publ) Labuan branch; the branch office in diaries in 2011. Liège, Belgium - Sirius International Insu- During the year, the subsidiary, Sirius In- rance Corporation (publ), Belgian Branch; ternational Holdings (NL) BV, has changed the branch office in Copenhagen, Denmark its functional currency from EUR to USD. - Sirius International Danish Branch, filial Upon the change of functional currency, af Sirius International Försäkringsaktiebo- the opening balances in the previous cur- lag (publ), the branch office in Hamilton, rency have been recalculated in the new Bermuda - Sirius International Insurance functional currency in accordance with IAS Corporation (publ) Bermuda Branch, the 21. This change to the new functional cur- branch office in Australia - Sirius Interna- rency has no impact on total shareholders’ tional Insurance Corporation (publ) Austra- equity. As at 1 January, 2010, the company lian Branch as well as Hamburg, Germany had entered into an internal currency where the operation is conducted through hedging agreement with White Mountains the agency Sirius Rückversicherungs Service Re Financial Services Ltd (WMReFS). This GmbH, which operates on behalf of Sirius agreement implies that Sirius International International. has sold MUSD 250 on the basis of a cur- During 2001, a voluntary liquidation of rency futures transaction to WMReFS with 9 Annual Report 2010 a duration of five years. With the help of Information on risks and factors of uncertainty foreign exchange options, the currency futu- Please refer to Note 1 "Accounting principles" res transactions are settled on the basis of an and Note 2 "Information on risks". exchange rate cap of SEK 11.93 per USD, and an exchange rate floor of SEK 5.11 per USD. Financial instruments and risk management Outside this range, the company takes no Please refer to Note 1 “Accounting principles” hedging measures. and Note 2 “Information on risks”. The significant flooding in the state of Queensland in north-east Australia, which be- Salaries and other remuneration to senior mem- gan at the end of December 2010, has conti- bers of the management nued through the first weeks of January 2011. Please refer to Note 32 “Average number of The damages from these floods will likely be employees, salaries and other remuneration”. defined as several events, which will affect several underwriting years to varying degrees. Insurance contracts with no significant Sirius International has exposures in the area, insurance risk regarding underwriting years 2010 and earlier, The Company has only a few contracts de- as well as underwriting year 2011. The as- emed to transfer insufficient insurance risk sessment is that the claims for 2010 will have and consequently do not qualify as insurance a negligible effect on the company. However, contracts. These contracts are classified as it is too early to say what the claims costs investment contracts. Please refer to Note 1 attributable to the flooding will be for the “Accounting principles”. company during 2011. On 22 February, 2011, another earthquake Expectations concerning future developments occurred in New Zealand. The earthquake’s The underlying profitability of the insurance magnitude was 6.3 on the Richter scale and operations is positive in spite of increasing had its epicentre near the city of Christ- competition and the diversified investment church. Sirius International is currently asses- portfolio is expected to contribute to a stable sing the impact on the company’s results. The return on investments. However, the conti- current estimate is that the costs attributable nued increased competition requires disci- to the earthquake will represent less than 2% pline in pricing and underwriting, continued of the solvency capital. efficiency improvements and a well-balanced risk relationship between insurance operations and investments in order to se- cure long-term profitability. For 2011, Sirius International’s objective is to achieve a com- bined ratio lower than 90% and an underwrit- ing return on capital (UROC) of 11%. 10 Annual Report 2010 11 Annual Report 2010 Five-year Summary Group MSEK Net premium income Net premiums earned Other technical income Allocated interest Net claims incurred Net operating expenses Insurance operating result Investment operating result Other expenses Net income for the year 2010 20094) 2008 2007 20061) 5,608 5,742 0 214 -3,428 -1,690 838 235 0 879 6,957 6,867 0 369 -4,164 -1,755 1,317 289 0 1,302 5,602 5,822 0 168 -3,659 -1,403 928 -74 -27 695 5,810 6,019 10 259 -3,471 -1,845 972 -51 -27 577 7,257 5,898 5 149 -3,046 -1,927 1,079 84 -35 669 Net technical provisions Market value on investment assets 5) 7,221 18,480 7,883 18,449 7,992 16,743 7,001 15,508 8,774 17,881 Insurance operating result Claims ratio Cost ratio Combined ratio Investment result Investment yield Total yield Solvency capital Shareholders’ equity Deferred tax on untaxed reserves Deferred tax on reserve for unrealized capital gains Other adjustment items Total solvency capital Solvency ratio Capital base 2) Required solvency capital Group based values 3) Capital base Solvency requirement Parent Company MSEK Net premium income Net premiums earned Allocated interest Net claims incurred Net operating expenses Insurance operating result Investment operating result Other expenses Net income for the year 60% 29% 89% 3% 1% 9,950 2,548 18 0 12,516 223% 11,735 958 61% 25% 86% 2% 3% 9,945 2,548 53 -2 12,544 180% 12,149 1,030 63% 24% 87% 3% 2% 8,017 2,420 18 0 10,455 187% 10,013 956 58% 30% 88% 6% 2% 7,833 2,581 -15 0 10,399 179% 9,764 956 16,315 2,255 17,544 2,373 17,236 2,566 18,482 2,369 2010 2009 2008 2007 5,608 5,742 214 -3,421 -1,687 839 -128 -4 522 6,957 6,867 369 -4,164 -1,761 1,311 -139 -17 490 5,602 5,822 168 -3,659 -1,408 923 106 -17 738 5,810 6,019 258 -3,418 -1,861 998 153 -17 430 51% 33% 84% 3% 1% 7,468 2,430 -5 0 9,893 136% 9,628 1,154 1) 2006 7,245 5,886 149 -2,807 -1,916 1,312 329 -25 227 Net technical provisions Market value on investment assets 5) 7,233 18,155 7,886 18,379 7,992 16,882 7,001 15,508 7,340 15,314 Insurance operating result Claims ratio Cost ratio Combined ratio Investment Result Investment yield Total yield Solvency Capital Shareholders’ equity Untaxed reserves Deferred tax on Reserve on reserve for unrealized capital gains Other adjustment items Total solvency capital Solvency ratio Capital base Required solvency capital 60% 29% 89% 3% 0% 2,564 9,687 18 0 61% 25% 86% 2% 3% 2,654 9,691 53 0 63% 24% 87% 3% 2% 1,295 9,197 18 0 57% 31% 88% 5% 3% 1,136 9,217 -15 0 48% 32% 80% 3% 3% 1,093 8,680 -14 0 12,269 12,398 10,510 10,338 9,759 219% 11,603 958 178% 12,021 1,030 188% 9,968 956 178% 9,776 956 135% 9,560 1,105 1) For the comparison year 2006 legally restricted IFRS has been applied. 2) Includes Sirius International with subsidiaries. 3) Includes WM Re Ltd. with subsidiaries. 12 4) For the comparison year 2009 IFRS has been applied. Solvency capital and required solvency capital have not been converted. 5) Includes investment assets and cash and bank with deduction for deposits received from reinsurers. Annual Report 2010 Proposed appropriation of earnings For 2010, the Parent Company recorded a result before appropriations and taxes of MSEK 707 (MSEK 1,155). Net income for the year amounted to a profit of MSEK 522 (MSEK 490). As of December 31, 2010 re- tained earnings in the Group amounted to MSEK 2,011. At the disposal of the General Meeting of the Shareholders of the Parent Company Sirius International: Retained earnings Unrestricted reserves Dividend paid, as resolved by the meeting of the shareholders Group contribution Net income for the year Total The Board of Directors and the President propose that the amount be appropriated as follows: - Dividends to owners - Retained earnings SEK in thousands 1,854,160 -98,350 -160,000 -354,190 522,367 1,763,987 435,695 1,328,292 1,763,987 The company’s financial position does not scope and risks of the operations. reflect any other view than that the com- Regarding the company’s and the Group’s pany can be expected to fulfil its obliga- results and financial position, please refer tions in the short-term, as well as in the to the attached income statements and ba- long-term. It is the opinion of the Board lance sheets, cash flow analyses, report on of Directors that the solvency capital of changes in shareholders' equity and accom- the company as it has been reported in the panying notes. annual report is adequate in relation to the 13 Annual Report 2010 Income Statement – Group January 1 - December 31 MSEK TECHNICAL ACCOUNT FOR INSURANCE OPERATIONS Earned premiums, for own account Gross premium income Ceded reinsurance premiums Change in the gross provision for unearned premiums Change in the provision for unearned premiums reinsurers' share Total earned premiums, for own account Allocated investment return transferred from the non-technical account Claims incurred, for own account Claims paid - Gross amount - Reinsurers’ share Claims paid, for own account Change in the provision for claims, for own account - Gross amount - Reinsurers’ share Total claims incurred, for own account Operating costs Operating profit/loss of technical account NON - TECHNICAL ACCOUNT Balance of technical account Investment income/expenses - Investment income - Unrealised gains - Investment expenses and charges - Unrealised losses Investment income allocated to the technical account Total investment income/expenses Result before taxes Taxes Net income for the year Note 2010 2009 3 3 4 4 5 10 6 7 8 9 11 7,395 -1,787 46 88 5,742 8,630 -1,673 -237 147 6,867 214 369 -4,428 937 -3,491 -1,595 1,658 -3,428 1,690 838 -4,243 431 -3,812 -206 -146 -4,164 -1,755 1,317 838 1,317 623 397 -466 -105 -214 235 421 635 -370 -28 -369 289 1,073 1,606 -194 879 -304 1,302 14 Annual Report 2010 Statement of Comprehensive Income - Group January 1 - December 31 MSEK Net income for the year Other comprehensive income - Change of fair value on bonds - Currency translation differences - Other Tax on components of other comprehensive income Other comprehensive income for the year, net of tax Note 2010 2009 879 1,302 -133 -295 0 35 -393 133 -219 2 -35 -119 Total comprehensive income for the year 486 1,183 15 Annual Report 2010 Balance Sheet - Group December 31 MSEK ASSETS Intangible assets Goodwill Capitalised software Total intangible assets Investment assets Land and buildings Shares and participations in associated companies Other financial investments - Shares and participations - Bonds and other interest bearing securities - Derivative financial instruments Total other financial investments Deposits with cedents Total investment assets Reinsurers’ share of technical provisions Provisions for unearned premiums Claims outstanding Total reinsurers’ share of technical provisions Debtors Debtors arising out of direct insurance operations Debtors arising out of reinsurance operations Current tax receivables Deferred tax receivables Pension assets Other debtors Total debtors Other assets Tangible assets Cash and bank balance Total other assets Prepayments and accrued income Accrued interest Deferred acquisition costs Other prepayments and accrued income Total prepayments and accrued income Note 2010 2009 1 January, 2009 12 13 15 291 22 313 291 5 296 291 1 292 2 2 4 2,178 2,185 2,101 16, 20 17, 20 18, 20 1,808 12,067 273 14,148 1,797 8,662 0 1,745 8,782 0 10,459 10,527 1,221 17,549 1,544 14,190 1,716 14,348 24 25 11 28 19 21 22 496 5,556 6,052 5 1,385 72 34 0 63 1,559 32 1,082 1,114 195 386 26 607 482 3,948 4,430 10 1,480 108 26 9 755 2,388 21 4,384 4,405 152 419 23 594 385 4,588 4,973 37 1,252 766 21 8 55 2,139 16 2,454 2,470 170 441 18 629 TOTAL ASSETS 27,194 26,303 24,851 16 Annual Report 2010 December 31 Note 2010 2009 1 January, 2009 SHAREHOLDERS’ EQUITY AND LIABILITIES Shareholders’ equity Share capital (8 million shares of nom. value SEK 100) Additional paid in capital Reserves Retained earnings – restricted Retained earnings – non-restricted, including net income for the year Total shareholders’ equity 800 1,424 -354 7,139 941 9,950 800 1,424 2 7,142 610 9,978 2,330 9,983 0 24 25, 27 26 2,062 11,211 0 13,273 12,313 28 11 5 0 0 2 2,553 2,575 151 2 474 593 193 125 14 513 626 157 20, 29 20 800 0 124 6,778 321 8,023 2,343 10,620 3 12,966 15 429 2,421 59 25 245 546 122 Liabilities Technical provisions Provisions for unearned premiums Claims outstanding Equalization provision Total technical provisions Other liabilities Employee benefits Current tax liabilities Deferred tax liabilities Deposits received from reinsurers Creditors arising out of direct insurance operations Creditors arising out of reinsurance operations Other liabilities Accrued expenses and deferred income Total other liabilities 3,971 4,012 3,862 TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES 27,194 26,303 24,851 Pledged assets and other comparable collaterals for own debts and provisions recorded as insurance liabilities Other pledged assets and comparable collaterals Contingent liabilities Commitments 30 30 30 30 7,668 6,647 8,527 - 60 - - 67 - - 79 - 17 Annual Report 2010 Change in shareholders´equity - Group MSEK Amount 1 January, 2010 Comprehensive income Net profit/loss for the year Other comprehensive income Change of fair value on bonds Reclassification within shareholders’ equity Currency translation differences Total other comprehensive income Total comprehensive income Transactions with owners Group contribution provided 3) Dividend paid 2) Total transactions with owners Amount 31 December, 2010 Amount 1 January, 2009 Comprehensive income Net profit/loss for the year Other comprehensive income Equalization provision 73.7% Change of fair value on bonds Reclassification within shareholders’ equity Currency translation differences Total other comprehensive income Total comprehensive income Transactions with owners Shareholders’ contribution 1) Group contribution provided 3) Dividend paid 2) Total transactions with owners Amount 31 December, 2009 Share Additional Reserves 4) Retained Retained Capital paid in earnings - earnings Total Share- capital 4) restricted – non-res- holders’ tricted 4) equity 7,142 610 9,978 800 1,424 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 -98 37 -295 -356 -356 0 0 0 800 1,424 -354 7,139 0 0 -3 0 -3 -3 0 0 0 879 879 -98 0 -295 -393 486 -354 -160 -514 9,950 0 -34 0 -34 845 -354 -160 -514 941 - 800 0 0 0 0 0 0 0 0 0 0 0 800 0 0 0 0 0 0 0 0 1,424 0 0 1,424 1,424 124 6,778 321 8,023 0 0 98 0 -220 -122 -122 0 0 0 0 2 0 0 0 364 0 364 364 0 0 0 0 7,142 1,302 1,302 2 0 -364 0 -361 941 0 -357 -295 -652 610 2 98 0 -220 -119 1,183 1,424 -357 -295 772 9,978 1) Received shareholders’ contribution from White Mountains Re Financial Services Ltd. 2) Dividend paid to the parent company Fund American Holdings AB. 3) Group contribution provided to Fund American Holdings AB and Sirius Insurance Holding Sweden AB. 4) The non-restricted shareholders’ equity for the group amounts of the non-restricted shareholders’ equity in the group companies. In the table above it is represented by the columns Additional paid in capital, Reserves and Retained earnings – non-restricted. 18 Annual Report 2010 SHARE CAPITAL Specified in number of shares Issued per 1 January Issued per 31 December 2010 2009 8,000,000 8,000,000 8,000,000 8,000,000 Per 31 December, 2010 the share capital comprised 8,000,000 (8,000,000) ordinary shares. The shares have a nominal value of 100 (100) SEK. 2010 2009 1,424 0 1,424 0 1,424 1,424 200 -133 67 -53 35 -18 147 -98 49 -145 37 -295 -403 7,142 -3 7,139 610 879 0 -34 -160 -354 941 67 133 200 -18 -35 -53 49 98 147 75 0 -220 -145 6,778 364 7,142 321 1,302 2 -364 -295 -357 610 ADDITIONAL PAID IN CAPITAL Opening additional paid in capital Shareholders’ contribution Closing additional paid in capital RESERvES Fair value reserve Opening fair value reserve Change for the year Closing fair value reserve Tax on fair value reserves Opening tax on fair value reserves Change for the year Closing tax on fair value reserve Fair value reserve after tax Opening fair value reserve after tax Change for the year Closing fair value reserve after tax Translation difference Opening translation difference Reclassification within shareholders’ equity Change for the year Closing translation difference RETAINED EARNINGS RESTRICTED Opening equity portion of untaxed reserves and other restricted reserves Change for the year Closing equity portion of untaxed reserves and other restricted reserves RETAINED EARNINGS NON-RESTRICTED Opening retained earnings – non-restricted Net profit/loss for the year Equalization provision 73.7% Reclassification within shareholders’ equity Dividend paid Group contribution provided 73.7% Closing retained earnings – non-restricted 19 Annual Report 2010 Cash flow statement - Group MSEK 2010 2009 OPERATING ACTIvITIES Profit/loss before tax 1) Adjustment for non-cash items Income tax paid Cash flow from current operations before changes in assets and liabilities Change in land and buildings Change in financial investments Change in other operating receivables Change in other operating liabilities Cash flow from operating activities INvESTING ACTIvITIES Acquisition of subsidiary Net investment in tangible assets Cash flow from investing activities FINANCING ACTIvITIES Dividends paid Shareholders´ contribution received Group contributions paid Cash flow from financing activities Cash flow for the year Cash and cash equivalents at beginning of year Cash flow for the year Cash and cash equivalents at end of year 2) 1) Of which Interest received Dividends received Total 2) Of which Cash and bank balances Current investments, equivalent to cash and cash equivalents Total 1,073 -295 -32 746 0 -3,109 -505 929 -1,939 -706 -25 -731 -160 0 -472 -632 -3,302 4,384 -3,302 1,082 475 153 628 300 782 1,082 1,606 -220 204 1,590 2 117 -202 -228 1,279 0 -13 -13 -295 1,424 -465 664 1,930 2,454 1,930 4,384 482 45 527 320 4,064 4,384 20 Annual Report 2010 "Our combined ratio of 89% was vir tually unchanged on 2009, maintaining our record of stability" 21 Annual Report 2010 Income Statement – Parent Company January 1 - December 31 MSEK TECHNICAL ACCOUNT FOR INSURANCE OPERATIONS Earned premiums, for own account Gross premium income Ceded reinsurance premiums Change in the gross provision for unearned premiums Change in provision for unearned premiums, reinsurers’ share Total earned premium, for own account Allocated investment return transferred from the non-technical account Claims incurred, for own account Claims paid - Gross amount - Reinsurers’ share Claims paid, for own account Change in the provision for claims, for own account - Gross amount - Reinsurers’ share Total claims incurred, for own account Change in other technical provisions, for own account - Gross amount Total change in other technical provisions, for own account Operating costs Operating profit/loss of technical account NON-TECHNICAL ACCOUNT Balance of technical account Investment income/expenses - Investment income - Unrealised gains - Investment expenses and charges - Unrealised losses Investment income allocated to the technical account Total investment income/expenses Goodwill depreciation Result before appropriations and taxes Appropriation to safety reserve Changes in excess depreciation on intangible assets Result before taxes Taxes Net income for the year 22 Note 2010 2009 3 3 4 4 26 5 10 6 7 8 9 12 11 7,395 -1,787 46 88 5,742 8,630 -1,673 -237 147 6,867 214 369 -4,415 937 -3,478 -1,601 1,658 -3,421 -9 -9 -4,243 431 -3,812 -206 -146 -4,164 0 0 -1,687 839 -1,761 1,311 839 1,311 649 184 -642 -105 -214 -128 -4 707 0 4 711 -189 522 385 228 -355 -28 -369 -139 -17 1,155 - 511 17 661 -171 490 Annual Report 2010 Statement of Comprehensive Income – Parent Company January 1 - December 31 MSEK Net income for the year Other comprehensive income - Change of fair value on bonds Tax on components of other comprehensive income Other comprehensive income for the year, net of tax Total comprehensive income for the year Note 2010 522 -133 35 -98 424 2009 490 133 -35 98 588 23 Annual Report 2010 Balance Sheet - Parent Company December 31 MSEK ASSETS Intangible assets Goodwill Other intangible assets Total intangible assets Investment assets Land and buildings Investments in group companies and associated companies - Shares and participations in group companies - Shares and participations in associated companies Total investments in group companies and associated companies Other financial investments - Shares and participations - Bonds and other interest-bearing securities - Derivative financial instruments Total financial investments Deposits with cedents Total investment assets Reinsurers’ share of technical provisions Provisions for unearned premiums Claims outstanding Total reinsurers’ share of technical provisions Debtors Debtors arising out of direct insurance operations Debtors arising out of reinsurance operations Current tax receivables Deferred tax receivables Other debtors Total debtors Other assets Tangible assets Cash and bank balance Total other assets Prepayments and accrued income Accrued interest Deferred acquisition costs Other prepayments and accrued income Total prepayments and accrued income Note 2010 2009 12 13 14 15 16, 20 17, 20 18 24 25 11 19 21 22 207 22 229 2212 5 217 2 2 1,081 2,058 3,139 874 12,067 24 12,965 1,221 17,327 496 5,556 6,052 5 1,384 61 35 262 1,747 31 979 1,010 194 386 26 606 656 2,058 2,714 1,251 8,662 0 9,913 1,544 14,173 482 3,948 4,430 10 1,480 95 25 756 2,366 20 4,331 4,351 152 419 21 592 TOTAL ASSETS 26,971 26,129 24 Annual Report 2010 December 31 Note 2010 2009 SHAREHOLDERS’ EQUITY, PROvISIONS AND LIABILITIES Shareholders’ equity Share capital (8 million shares of nom. value SEK 100) Other reserves Retained earnings Net income for the year Total shareholders’ equity Untaxed reserves Excess depreciations on intangible assets Safety reserve Total untaxed reserves Technical provisions Provisions for unearned premiums Claims outstanding Equalisation provision Total technical provisions Provisions for other risks and expenses Current tax liability Deferred tax liability Total provisions for other risks and expenses Deposits received from reinsurers Creditors Creditors arising out of direct insurance operations Creditors arising out of reinsurance operations Other creditors Total creditors Accrued expenses and deferred income Accrued expenses and deferred income Total accrued expenses and deferred income TOTAL SHAREHOLDERS’ EQUITY, PROvISIONS AND LIABILITIES Pledged assets and other comparable collaterals for own debts and provisions recorded as insurance liabilities Other pledged assets and comparable collaterals Contingent liabilities Commitments 23 24 25, 27 26 28 11 20, 29 20 30 30 30 30 800 49 1,193 522 2,564 40 9,647 9,687 2,062 11,211 12 888800 147 1,217 490 2,654 44 9,647 9,691 2,330 9,983 3 13,285 12,316 9 0 9 0 21 21 151 125 2 473 608 14 513 638 1,083 1,165 192 192 157 157 26,971 26,129 7,668 6,647 - 60 - - 67 - 25 Annual Report 2010 Change in shareholders´ equity - Parent Company MSEK Amount 1 January, 2010 Transfer of net result from previous year Comprehensive income Net profit/loss for the year Other comprehensive income Change of fair value on bonds Total other comprehensive income Total comprehensive income Transactions with owners Group contribution provided 2) Dividend paid 3) Total transactions with owners Amount 31 December, 2010 Amount 1 January, 2009 Transfer of net result from previous year Comprehensive income Net profit/loss for the year Other comprehensive income Change of fair value on bonds Total other comprehensive income Total comprehensive income Transactions with owners Shareholders’ contribution 1) Group contribution provided 2) Dividend paid 3) Total transactions with owners Amount 31 December, 2009 Share Capital Other Retained Net profit/ reserves 4) earnings 4) loss for the 800 147 1,217 year 4) 490 -490 522 0 0 490 0 0 0 490 522 -354 -160 -514 0 0 0 Total Share- holders’ equity 2,654 0 522 -98 -98 424 -354 -160 -514 0 0 0 0 0 0 0 0 0 0 -98 -98 -98 0 0 0 800 49 1,193 522 2,564 800 0 0 0 0 0 0 0 0 0 49 0 0 98 0 98 0 0 0 0 -292 738 0 0 0 0 1,424 -358 -295 771 738 -738 490 0 490 490 0 0 0 0 1,295 0 490 98 98 588 1,424 -358 -295 771 800 147 1,217 490 2,654 1) Received shareholders’ contribution from White Mountains Re Financial Services Ltd. 2) Group contribution provided to Fund American Holdings AB and Sirius Insurance Holding Sweden AB. 3) Dividend paid to the parent company Fund American Holdings AB. 4) The columns Other reserves, retained earnings and Net profit/loss for the year together represents the non-restricted shareholders’ equity for the parent company. 26 Annual Report 2010 SHARE CAPITAL Specified in number of shares, SEK Issued per 1 January Issued per 31 December 2010 2009 8,000,000 8,000,000 8,000,000 8,000,000 Per 31 December, 2010 the share capital comprised 8,000,000 (8,000,000) ordinary shares. The shares have a nominal value of 100 (100) SEK. 2010 2009 200 -133 67 -53 35 -18 147 -98 49 1,217 490 0 -160 -354 1,193 67 133 200 -18 -35 -53 49 98 147 -292 738 1,424 -295 -358 1,217 522 490 OTHER RESERvES Fair value reserve Opening fair value reserve Change for the year Closing Fair value reserve Tax on Fair value reserve Opening tax on Fair value reserve Change for the year Closing tax on Fair value reserve Fair value reserve after tax Opening Fair value reserve Change for the year Closing Fair value reserve after tax RETAINED EARNINGS Opening retained earnings Transfer of net result from previous year Shareholders’ contribution Dividend paid Group contribution provided 73.7% Closing retained earnings NET PROFIT/LOSS FOR THE YEAR Net profit/loss for the year 27 Annual Report 2010 Cash flow statement - Parent Company 2010 2009 OPERATING ACTIvITIES Profit/loss before tax 1) Adjustment for non-cash items Income tax paid Cash flow from current operations before changes in assets and liabilities Change in land and buildings Change in financial investments Change in other operating receivables Change in other operating liabilities Cash flow from operating activities INvESTING ACTIvITIES Net investment in tangible assets Cash flow from investing activities FINANCING ACTIvITIES Dividends paid Shareholders’ contribution received Group contributions paid Cash flow from financing activities Cash flow for the year Cash and cash equivalents at beginning of year Cash flow for the year Cash and cash equivalents at end of year 2) 1) Of which Interests received Dividends received Total 2) Of which Cash and bank balances Current investments, equivalent to cash and cash equivalents Total 711 -4 -25 682 0 -3,611 -718 949 -2,698 -22 -22 -160 0 -472 -632 -3,352 4,331 -3,352 979 599 9 608 421 558 979 661 515 204 1,380 2 296 -202 -228 1,248 -12 -12 -295 1,424 -465 664 1,900 2,431 1,900 4,331 481 9 490 316 4,015 4,331 28 Annual Report 2010 Performance analysis - Parent Company The performance analysis is substantially the same for the Group and the Parent Company. Analysis of Insurance Result Direct Swedish Direct Swedish Direct Assumed MSEK risks - aviation risks - financial foreign risks reinsurance Total 6 0 -3 -1 0 2 0 -1 -2 0 0 -3 0 0 0 7 -1 0 0 6 -2 0 0 -1 0 -3 1 0 0 0 0 1 0 0 0 0 0 0 0 0 0 1 0 0 0 1 0 0 0 0 0 0 648 5,087 5,742 14 -323 -292 3 50 32 -353 -277 -8 0 200 -3,095 -1,394 -12 786 906 214 -3,421 -1,687 -9 839 938 -1,708 -10,803 -121 -12 -2,062 -11,082 -129 -12 -638 -12,644 -13,285 88 70 158 871 -206 -29 12 648 408 5,486 5,894 6,516 -1,580 75 76 496 5,556 6,052 7,395 -1,787 46 88 5,087 5,742 -382 -3,857 -4,241 85 -8 -27 9 -323 852 -166 -1,573 1,649 -3,095 937 -174 -1,601 1,658 -3,421 Technical result insurance operations Premiums earned, for own account Allocated investment return transferred from the non- technical account Claims incurred, for own account Operating costs Change of equalisation provision Technical result of insurance operations Of which results from prior years, gross amounts 1) Technical provisions Unearned premiums and remaining risks Outstanding claims Claims adjustment provision Equalisation provision Technical provisions Reinsurers´ share of technical provisions Unearned premiums and remaining risks Outstanding claims Reinsurers´ share of technical provisions Premiums earned, for own account Gross premium income Ceded reinsurance premium Change in gross provision for unearned premiums Reinsurers’ share of change in unearned premiums Premiums earned, for own account Claims incurred, for own account Claims paid Reinsurers’ share Claims handling expenses Change in provision for outstanding claims Reinsurers’ share Claims incurred, for own account 1) Defined as result from 2009 and earlier. 29 Annual Report 2010 Note 1 • Accounting Principles General information This annual report was issued per 31 December, 2010 and refers to Sirius International Försäkringsaktiebolag (publ), both the Group and the Parent Company, which is an insurance company with its registered offices in Stockholm. The address of the head office is Birger Jarlsgatan 57B, Stockholm and the Corporate Identity Number is 516401-8136. Compliance with standards and law The Company's annual report has been prepared in accordance with the Swedish Act on Annual Accounts in Insurance Companies (ÅRFL), as well as the Swedish Financial Supervisory Authority's regulations and general advice on Annual Reports in Insurance Companies (FFFS 2008:26) with the amendments in FFFS 2009:12 and the Swedish Financial Reporting Board RFR 2.2. The Sirius International Group’s annual report has been prepared in ac- cordance with the Swedish Act on Annual Accounts in Insurance Companies (ÅRFL), as well as the Swedish Financial Supervisory Authority's regulations and general advice on Annual Reports in Insurance Companies (FFFS 2008:26) with the amendments in FFFS 2009:12 and the Swedish Financial Reporting Board RFR 1 Supplementary Accounting Rules for Groups, as well as International Financial Reporting Standards (IFRS) and IFRIC interpreta- tions as adopted by the EU. Assumptions in the preparation of the Company’s financial reports The Company’s functional currency is the Swedish krona (SEK) and the financial reports are presented in Swedish kronor. Unless otherwise stated, all amounts are rounded to the nearest million. Assets and liabilities are recorded at acquisition cost, with the exception of certain financial assets and liabilities which are valued at fair value. Financial assets and liabilities valued at fair value consist of derivative instruments, financial assets clas- sified as financial assets valued at fair value via the income statement or as available-for-sale financial assets. Changed accounting principles No changes to the accounting principles have been made during the year, other than those resulting from the adaptations to International Financial Reporting Standards as described below. The Swedish Financial Supervisory Authority’s revised regulations and general advice, FFFS 2009:12, came into force on 1 January, 2010 and are applied in the annual financial statements, annual report and consolidated financial statements prepared for the financial year commencing after 31 December, 2009. The revision entails that the application of limited IFRS in the consolidated financial statements is no longer possible and, instead, International Financial Reporting Standards according to IAS are to be app- lied in full for 2010. As the Company follows these revised regulations and general advice, all standards, statements and interpretations in accordance with the regulations of IAS are applicable as of 1 January, 2009, which is the date of the Group’s transition to IFRS. The effects of the transition to International Financial Reporting Standards according to the regulations of IAS are described under Note 36 “Transition to International Financial Reporting Standards”. Changes to standards, statements and interpretations A number of standards, statements and interpretations have been published in connection with the preparation of the Company’s annual report per 31 December, 2010 but have not yet come into force. In addition, certain stan- dards, statements and interpretations currently in force have been changed, and certain standards, statements and interpretations have come into force during 2010. Below follows a summary and a preliminary assessment of the effect these standards, statements and interpretations may have on the Company’s financial reports. Changes other than those given below are not deemed relevant to the Company, alternatively are not expected to affect the Group’s financial reports. • IFRS 9, “Financial instruments”, published November 2009. This standard is the first step in the process of replacing IAS 39, “Financial instruments: Recognition and Measurement”. IFRS 9 introduces two new requirements for the valuation and classification of financial assets and is likely to have a negligible affect on the Group’s reporting of financial assets. The Group is yet to evaluate the future effects of these requirements on the financial sta- tements. The standard is not applicable for financial years beginning before 1 January 2013 but is available for early adoption. However, the standard is yet to be adopted by the EU. • IAS 24 (revised). “Related Party Disclosures”, published November 2009. This standard replaces IAS 24, “Related Party Disclosures”, published 2003. IAS 24 (revised) is to be applied for financial years beginning 1 January, 2011 or later. Early application of the standard is permitted both in part and as a whole. The revised standard clarifies and simplifies the definition of Related Party and provides an exemption from the disclosure requirements for transactions between a government-controlled reporting entity and that government or other entities controlled by that government. The Group will apply the revised standard from 1 January, 2011. The current assessment is that this change will have no material effect on the Group’s financial statements Assessments and estimates in the financial statements The preparation of financial statements in conformity with International Financial Reporting Standards requires the Company’s management to make assessments and estimates, as well as assumptions impacting the application of the accounting principles and the recorded values of assets, provisions, liabilities, income and expenses. These estimates and assump- tions are based on historical experience and a number of other factors con- sidered reasonable in the current situation. The results of these estimates and assumptions are, subsequently, used to assess the recorded values of assets, provisions and liabilities which are not otherwise clearly apparent from other sources. Actual outcome can deviate from these estimates and assessments. Estimates and assumptions are reviewed on a regular basis. Changes in estimates are recorded in the period in which the change is made if the change only affects that period, or the period in which the change is made as well as future periods, if such change affects both current and future periods. Significant assessments in the application of the Accounting principles have been made in conjunction with the decision to report financial instruments at fair value, as well as in conjunction with the decision to classify insurance contracts as insurance or investment contracts. Insurance contracts and financial instruments According to IFRS 4, contracts transferring significant insurance risk should be classified as insurance. The Company has made the assessment that insurance risk in excess of five percent should be deemed significant and the contract is thus classified as insurance. All agreements which legally can be considered insurance contracts have been subject to assessment regarding whether they signify a transfer of significant insurance risk, so that they can also be presented as insurance contracts in the accounts. In the case of certain agreements which are a combination of risk and savings, the Company has been obligated to under- take an assessment of the contracts which can be considered to signify a transfer of significant insurance risk. The amount of the insurance risk has been assessed through a consideration of whether there exists one or more scenarios with commercial implications in which the insurance company would be liable to pay significant further benefits in excess of the amount which would have been paid had the insured event never occurred. Certain contracts include an option for the contract holder to insure themselves in the future. The Company does not consider such options, in themselves, to constitute a material insurance risk. 30 Annual Report 2010 Classification of financial assets and liabilities The Company’s accounting principles provide detailed definitions of the manner in which assets and liabilities should be classified into different categories: • The classification of financial assets and liabilities held for trade presumes that these correspond to the description of financial assets and liabilities held for trade in the accounting principles. • Financial assets and liabilities that the Company has initially chosen to value at fair value via the income statement under the presumption that the criteria of the accounting principles have been fulfilled. • Financial assets and liabilities classified as available-for-sale presume that the criteria specified in the accounting principles have been fulfilled. Effects of the above-named classifications entail that changes in fair value of equity securities are reported in the income statement and changes in fair value on bonds and other interest-bearing securities are reported in Other comprehensive income. Important sources of uncertainty in estimates The Company makes assessments and estimates forming the basis for the valuation of certain assets, provisions and liabilities. These assessments and valuations are made on an ongoing basis and are based on previous experience and future expected outcomes. Technical provisions The Company’s accounting principles for insurance contracts are described below. The Company’s most critical accounting estimate concerns insu- rance technical provisions. This estimate is based on historical experience and other relevant factors considered as reasonable. Even if the applied methods and employed parameters are assessed as correct, future outco- mes may deviate from the expected value. The process applied for the determination of central assumptions, forming the basis for the valuation of the provisions, is described in Note 2. Determination of fair value of financial instruments The valuation methods described below have been applied in the valuation of financial assets and liabilities for which there is no observable market price. There may be some uncertainty as regards the observed market price for financial instruments with limited liquidity. Such instruments may, therefore, require further assessments, depending on the uncertainty of the market situation. Company management has discussed the development, selection and disclosure of significant accounting principles and estimates of the Group and of the Parent Company, as well as discussing the application of these principles and estimates. The specified accounting principles have been consistently applied to all periods presented in the financial statements, unless stated otherwise below. Approval The annual accounts were approved for publication by the Board of Direc- tors on 4 March, 2011. The income statement and balance sheet will be adopted at the General Meeting held in May 2011. Consolidation principles Subsidiaries Subsidiaries are companies in which the Parent Company has a controlling influence. The term “controlling influence” refers to the direct or indirect right to formulate a company’s financial and operative strategies with the intention of receiving financial benefit. Subsidiaries are reported according to the purchase accounting method. This method implies that the acquisition of subsidiaries is considered to be a transaction through which the Group indirectly acquires the subsidiary’s assets and takes over its provisions, lia- bilities and contingent liabilities. The Group acquisition value is determined through an acquisition analysis concurrent with the acquisition. In the case of business acquisitions in which the acquisition cost exceeds the net value of the acquired assets and assumed provisions and liabilities and contingent liabilities, the difference is recorded as goodwill. When the difference is negative, this is recorded directly in the income statement. Subsidiaries’ financial statements are included in the consolidated ac- counts from the date of acquisition until the date upon which the controlling influence ceases. Associated companies Associated companies are those companies in which the Group has a significant, but not controlling, influence over the operational and financial administration, usually through the holding of participations between 20% and 50% of the number of votes. From the point in time when the significant influence is acquired, participations in associated companies are recorded in the consolidated accounts according to the equity method. The equity method implies that the value of the shares in the associated company, reported in the Group, corresponds to the Group’s share of the associated companies’ equity and Group goodwill and any other remaining amount of positive or negative group adjustment in consolidation. The Group’s participations in the associate’s net profit after taxes and minority interests, adjusted for any amortisation, impairment or dissolution of acquired surplus or deficit value, are reported in the consolidated income statement under the item ”Share of associated companies’ income”. Dividends received from associated companies decrease the book value of the investment. When the Group’s share of reported losses in an associated company exceeds the book value of the Group’s participations in the company, the value of the participations is reduced to zero. The equity method is applied up to the point in time when the significant influence ceases. Transactions eliminated on consolidation Receivables and liabilities, income and expenses, and unrealised gains and losses arising on internal transactions between Group companies are eliminated in their entirety when the consolidated financial statements are prepared. Unrealised gains arising from transactions with associated companies and joint ventures are eliminated to the extent corresponding to the Group’s participating interest in the company. Unrealised losses are eliminated in the same manner as unrealised gains, but only to the extent there is no write-down requirement. Foreign currency Transactions in foreign currency Transactions in foreign currency are translated to the functional currency at the exchange rate prevailing on transaction date. The Parent Company’s, including the branch offices, and the Group’s, functional currency is the Swedish krona and the closing rate on the balance sheet date has been used in the valuation of assets, provisions and liabilities in foreign currency. Exchange rate fluctuations are recorded net in the income statement on the lines, Investment, income or Investment, expenses. Financial statements of foreign operations Assets and liabilities in foreign operations, including goodwill and other Group surplus and deficit values, are translated from the functional currency of the foreign operation to the Group’s reporting currency, Swedish kronor, at the exchange rate prevailing on the balance sheet date. Income and expenses in foreign operations are translated into Swedish kronor at an average rate that approximates the exchange rates prevailing at the date of the respective transactions. Translation differences arising in the currency translation of foreign operations are recorded in other comprehensive income. Net investments in foreign operations Translation differences arising in the translation of foreign net investments and the associated effects of the hedging of net investments are recorded in other comprehensive income. Upon disposal of a foreign operation, accumulated translation differences attributable to the operation, less any currency hedging, are realised in the Group’s income statement. 31 Annual Report 2010 Rates for the most important currencies Currency Closing Average USD 6.70 7.21 EUR 8.98 9.54 GBP 10.44 11.12 Insurance contracts Insurance contracts are recorded and valued in the income statement and balance sheet in accordance with their financial substance as opposed to their legal form, in the event that these differ. Contracts transferring material insurance risks from the policyholder to the Company and whereby the Company agrees to compensate the policyholder or other beneficiary in the event that a pre-determined insured event occurs are recorded as insurance contracts. Financial instruments are contracts which do not transfer any material insurance risk from the policyholder to the Company. The Company has issued a policy entailing a mandatory test of whether suffi- cient insurance risk exists in written contracts for classification as insurance contracts. This test builds upon definitions in accordance with IFRS 4. For contracts or groups of contracts classified as insurance contracts, recor- ding and valuation are carried out in accordance with previously applied principles. For contracts or groups of contracts which are not classified as insurance contracts, recording and valuation are conducted according to IAS 39, Financial Instruments or according to IAS 18, Revenue. Recording of insurance contracts Revenue recognition/Premium income Gross premiums written relate to insurance contracts incepted during the financial year, together with any differences between booked premiums for prior financial years and those premiums previously accrued, and include estimates of premiums due but not yet receivable or notified, less an allowance for cancellations. The gross premium income also includes the net of entered and withdrawn premium portfolios. Gross premiums written are stated before deduction of brokerage, taxes, duties levied on premiums and other deductions. Premiums are earned on a pro rata temporis basis over the term of the related contract, except for those contracts where the period of risk differs significantly from the contract period, or where the ex- posure vary during the contract period. In these circumstances, premiums are recognized as earned over the period of risk in proportion to the amount of insurance protection provided. Reinstatement premiums receivable are recognized and fully earned as they fall due. Premium revenue corresponds to the portion of premium income that has been earned. Unearned premi- ums are allocated to Provision for unearned premiums. Acquisition costs By acquisition costs are meant such operating expenses that directly or indirectly vary with the acquisition or renewal of insurance contracts. The deferred acquisition costs are expensed in correspondence with the periodi- sation for earned premiums for the related insurance contracts. Technical provisions Technical provisions consist of the Provisions for unearned premiums and unexpired risks, Provisions for outstanding claims, claims handling provision and equalization provision (in the Parent Company). Provision for unearned premiums and unexpired risks In the balance sheet, this provision consists of amounts corresponding to the Company’s liability for claims, administrative expenses and other costs during the remainder of the contract period for policies in force. “Policies in force” refers to insurance policies in accordance with entered agreements irrespective if they wholly or in part relates to later insurance period. In calculating these provisions, an estimate is made of anticipated costs for any claims that may occur during the remaining terms of these insurance policies, as well as administrative expenses for this period. The estimation of costs is based on the Company’s own experience and considers both the observed and the forecasted development of relevant costs. Unexpired risk refers to the risk that the insurance contract’s future claims and expenses cannot be covered by unearned and expected premium revenue after the close of the financial year. Provisions for unearned premiums are estimated with the help of the une- arned portion of the premium for policies in force, generally using a pro rata temporis calculation in accordance with the insurance contract’s terms and conditions or over the contract period in relation to the insurance coverage for the period. If the premium level for policies in force is considered insuf- ficient the deferred acquisition costs are first written down, then a provision is made for unexpired risks. The periods change in provisions for unearned premium and unexpired risks is recorded in the income statement. Provision for outstanding claims This balance sheet item comprises of estimated undiscounted cash flows relating to final costs for settlement of all claims resulting from events occurring before the close of the financial year, with deduction of those amounts that have already been paid, on the basis of receipt of claims payment advices. This amount also includes estimated undiscounted cash flows regarding future external costs for the settlement of incurred but, as of balance sheet date, outstanding claims, as well as refunds that are due for payment. The provision for incurred but not reported claims (IBNR) includes ex- penses for incurred but, to date, unknown claims and not yet fully reported claims. This amount is an estimate based on historic experience of the outcome of claims. The income statement records the change in outstanding claims for the period. Claims adjustment provision The amount of this provision is based on outstanding claims. The provision is equal to 2% of reported unpaid claims and 4% of incurred unreported and not yet fully reported claims. The claims handling reserve for catastrophe insurance is calculated in the same way, but with the difference that they are calculated on a five year average for those provisions. The period’s change in the claims adjustment provision is recorded in the income statement within the items Claims handling expenses and Operating costs. Provision adequacy testing The Company’s applied accounting and valuation principles for the balance sheet items Deferred acquisition costs, Provisions for unearned premiums and Unexpired risks automatically entail testing of whether the provisions are sufficient with regard to expected future cash flows. Deferred acquisition costs for insurance contracts Deferred acquisition costs are only recorded for insurance contracts deemed to generate a margin at least covering the acquisition costs. Sirius only records external deferred acquisition costs. The asset is tested for im- pairment each quarter to ensure that the contracts are deemed to generate a margin that, as a minimum, covers the value of the asset. Other costs for insurance contracts are recorded as costs when they arise. Operating costs All operating costs are allocated in the income statement according to their functional nature, acquisition, claims adjustment, administration, commission and profit shares in ceded reinsurance, investment expenses and in certain cases, other technical costs. Changes in technical provisions for insurance contracts are recorded in the income statement under each heading. Payments to policyholders, due to insurance contracts or incurred claims, during the financial year, are recorded as claims paid, regardless of when the claim was incurred. Ceded reinsurance As premiums for ceded reinsurance are recorded amounts paid during the financial year, amounts recorded as liabilities to the company that have assumed the reinsurance, in accordance with entered reinsurance agreements, and also premium portfolios. These premiums are periodised so that costs are allocated to the corresponding period of the insurance cover. All items relating to ceded reinsurance are shown on separate lines 32 Annual Report 2010 in the income statement. Deductions are made for amounts credited due to portfolio transfers or a change in the reinsurer’s share of proportional reinsurance contracts. The reinsurers’ share of technical provisions are recorded as an asset in the balance sheet and corresponds to the reinsurers’ liability for technical provisions in accordance with entered agreements. The Company assesses any required impairment for assets referring to reinsurance agreements bi- annually. If the recoverable amount is lower than the carrying amount of the asset, the asset is impaired to the recoverable amount and the impairment is recorded in the income statement. Reporting of investment return Investment income allocated to the technical account Investment return is transferred from the non-technical account to the technical account on the basis of average technical provisions for the Company’s own account, less deductions for net receivables in insurance operations. This capital base is allocated per currency. The transferred investment return is calculated on the basis of an interest rate per currency equivalent to the actual total yield from the investment assets belonging to the insurance operations. The weighted average interest rate for 2010 amounted to 3.69%. Applied interest rates EUR GBP SEK USD 2010 2009 2.90% 1.80% 0.50% 4.20% 2.68% 8.19% 2.06% 8.40% Investment income The item Investment income refers to yield from investment assets and comprises rental income from land and buildings, dividends from shares and participations, including dividends from shares in Group companies and as- sociated companies, interest income, net foreign exchange gains, reversed impairments and net capital gains. Investment expenses and charges Charges on investment assets are recorded under the item Investment expenses and charges. The item comprises operating costs for land and buildings, asset management costs, interest expense, net foreign exchange losses, depreciations and impairments and net capital losses. Changes in realised and unrealised gains and losses For investment assets valued at acquisition value, capital gain comprises the positive difference between sale price and book value. For investment assets valued at fair value, a capital gain is the positive difference between sale price and acquisition value. For interest-bearing securities, acquisition value is the amortised cost value and, for other investment assets, it is the historical acquisition value. At the sale of investment assets, previously unrealised changes in value are recognised as adjustment entries under the item Unrealised profits from investment items or Unrealised losses from in- vestment items, as appropriate. As regards interest-bearing securities clas- sified as available-for-sale financial assets, previously unrealised changes in value are recognized as adjustment entries in Other comprehensive income. Capital gains from assets other than investment assets are recorded as Other income. Unrealised gains and losses are recorded net per asset class. Changes due to exchange rate fluctuations are recorded as exchange rate gains or exchange rate losses under the item Investment income/expenses. Taxes Income tax Income taxes consist of current tax and deferred tax. Income taxes are recorded in the income statement, except when the underlying transaction is recorded in Other comprehensive income, whereupon the pertaining tax effect is recorded in Other comprehensive income. Current tax is tax to be paid or received regarding the current year, with application of the tax rates which have been enacted or practically enacted at balance sheet date, which also includes the adjustment of current tax referring to previous periods. Deferred tax is calculated according to the balance sheet method on the basis of temporary differences between the book values of assets and liabilities and their tax values. Temporary differences are not considered as regards differences arising at the initial recording of goodwill and the initial recording of assets and liabilities that are not business acquisitions and which did not affect either net profit/loss or taxable profit/loss at the transaction date. Furthermore, temporary differences referring to participa- tions in subsidiaries or associated companies that are not expected to be reversed within the foreseeable future are not considered either. The valua- tion of deferred tax is based on the extent to which underlying assets and liabilities are expected to be realised or settled. Deferred tax is calculated with the application of the tax rates and regulations that have been enacted or practically enacted as per balance sheet date. Deferred tax assets regarding deductible temporary differences and losses carry-forward are recorded only to the extent that they are likely to be utilised. The value of deferred tax assets is reduced when it is no longer considered likely that they can be utilised. Intangible assets Goodwill Goodwill comprises the amount by which the acquisition cost exceeds the fair value of the Group’s participation in the acquired subsidiary’s or associate’s identifiable net assets at the point in time of the acquisition. Goodwill on the acquisition of subsidiaries is recognised as an intangible asset. Goodwill is tested annually for impairment and is recognised at acquisition cost less accumulated impairment losses. Impairment losses of goodwill are not reversed. Profit or loss on the sale of a unit includes the remaining carrying value of goodwill referring to the unit sold. Goodwill is distributed to cash-generating units upon testing of any write-down requirement. Other intangible assets Other intangible assets which have been acquired separately are reported at acquisition cost. Other intangible assets acquired through a business acquisition are reported at fair value as per the acquisition date. Acquired Other intangible assets are capitalised on the basis of the costs arising at the point in time in which the asset in question was acquired and put into operation. These capitalised costs are amortised during the assessed useful life of three years. Self-developed software Costs for maintenance of software are charged at the time at which they arise. Development costs directly attributable to the development and tes- ting of identifiable and unique software products controlled by the Company are reported as intangible assets when the following criteria are fulfilled: • it is technically possible to prepare the software for use, • the Company’s intention is to complete the software and to put it into use, • the conditions for the use of the software are in place, • the manner in which the software can generate probable future economic benefits can be demonstrated, • adequate technical, financial and other resources for the completion of development and for the use of the software are accessible, and • expenditure attributable to the software during its development period can be calculated in a reliable manner. Other development costs, which do not fulfil these criteria, are charged at the time at which they arise. Development costs which have previously been charged are not reported as an asset in the following period. Develop- ment costs for software reported as an asset are amortised during their assessed useful life, which does not exceed three years. 33 Annual Report 2010 Land and buildings All properties owned by the Company are operational properties and are valued using the acquisition cost method, in accordance with IAS 16. The Company owns three properties located in Sweden and Belgium. Sirius reports its properties in accordance with the acquisition cost method and the capitalised costs are depreciated over 50 years. No depreciation is carried out on land. Financial instruments Financial instruments recorded in the balance sheet include, on the asset side, shares and participations, loan receivables, bond and other interest- bearing securities as well as derivatives. Where appropriate, derivatives with negative market value are included among liabilities, other liabilities and shareholders' equity. Acquisitions and disposals of financial assets are recorded on trade date, the date upon which the Company commits to acquire or dispose of the asset. Classification and valuation Financial instruments which are not derivatives are initially recorded at acquisition value corresponding to the fair value of the instrument plus transaction costs, except in the case of instruments belonging to the category Financial assets recorded at fair value via the income statement, which are recorded at fair value exclusive of transaction costs. A financial instrument is classified when it is initially reported, based upon the purpose for which the instrument was acquired. This classification determines the manner in which the financial instrument will be valued after initial recording, as described below. Derivative instruments are recorded at fair value both initially and on an ongoing basis. Changes in fair value are recorded in the manner described below. Financial assets valued at fair value via the income statement This category consists of two sub-groups: financial assets available for sale and other financial assets that the Company had initially chosen to be placed into this category (according to the so-called Fair Value Option). Financial in- struments in this category are continually valued at fair value, with changes in value recorded in the income statement. The first sub-group includes deri- vatives with a positive fair value. The second sub-group consists of financial investments in shares and participations, except for shares in subsidiaries or associated companies. Calculation of fair value Financial instruments listed on an active market For financial instruments listed on an active market, fair value is determined on the basis of the asset’s listed bid rate at balance sheet date, with no added transaction costs (e.g. commission) at the time of acquisition. A financial instrument is considered to be listed in an active market if listed pri- ces are easily accessible on a stock exchange, with a trader, broker, trade association, company supplying current price information or supervisory authority and these prices represent actual and regularly occurring market transactions under business-like conditions. Possible future transaction costs from a disposal are not considered. These instruments are included in the balance sheet items Shares and participations and Bonds and other interest-bearing securities. The predominant proportion of the Company’s financial instruments has been assigned a fair value with prices quoted on an active market. Financial instruments not listed on an active market If the market for a financial instrument is not active, the Company esta- blishes the fair value by means of various valuation techniques. As far as is possible, the valuation methods employed are based on market data, while companyspecific information is used to the least degree possible. The Company regularly calibrates valuation methods and tests their validity by comparing the outcome of the valuation methods with prices from observa- ble current market transactions in the same instrument. The total effect in the Income Statement from financial instruments valued at fair value in the balance sheet by using valuation techniques based on assumptions that are neither supported by the prices from observable current market transactions in the same instruments, nor based on available observable market information, amounted to a profit of MSEK 5, while the recorded value per balance sheet date of 31 December, 2010 amounted to MSEK 802. Accounts receivable Account receivables are non-derivative financial assets which are not listed on an active market and with fixed or determinable payments. Accounts receivables are reported in the amounts which are expected to be received, that is, after deductions for bad debt provisions. Available-for-sale financial assets The category available-for-sale financial assets include financial assets not classified in any other category or financial assets that the Company has initially chosen to classify in this category. The holding of bonds and other interest-bearing securities is recorded here. Assets in this category are continuously valued at fair value with changes in value recorded in other comprehensive income, except for changes in value due to impairment or to foreign exchange rate differences on monetary items recorded in the income statement. Furthermore, interest on interest-bearing instruments is recorded in accordance with the effective interest method in the income statement. As regards these instruments, any transaction costs will be included in the acquisition value when initially reported, and will, thereaf- ter, be assessed on an ongoing basis at fair value, to be included in other comprehensive income, until that point in time the instruments in question mature or are disposed. At disposal of the assets, the accumulated profit/ loss is recorded in the income statement. A long-term approach forms the basis for investments in this category, where the yield granted by these instruments at the time of investment is of significance for which investments shall be made. Other financial liabilities Borrowings and other financial liabilities, for example, accounts payable, are included in this category. These liabilities are valued at fair value including transaction costs. Financial guarantees Financial guarantee agreements are recorded as insurance contracts in ac- cordance with the accounting principles described in the section Accounting of insurance contracts, above. Write-downs of financial instruments Impairment testing of financial assets At each reporting date, the Company assesses whether there exists any objective evidence indicating that a financial asset or group of assets requires impairment as a consequence of one or several events occurring after the asset is reported for the first time and that these loss-making events have an impact on the estimated future cash flows from the asset or group of assets. If there is objective evidence indicating that an impairment requirement may exist, the assets in question are considered to be doubtful. Objective evidence is constituted both of observable conditions which have arisen and which have a negative impact on the possibility of recovering the acquisition cost, and of significant or extended reductions of the fair value of a financial investment classified as an available-for-sale financial asset. Reversal of impairment An impairment is reversed if an indication exists both that the impairment requirement no longer exists and that a change has taken place in the as- sumptions forming the basis of the estimation of the impaired amount. The impairment of held-for-maturity investments or loans receivable and account receivables, recorded at amortised cost, is reversed if a later increase of the recoverable amount can be objectively related to an event occurring 34 Annual Report 2010 after the impairment has been performed. The impairment of interest-bearing instruments, classified as available- for-sale financial assets, is reversed via Other comprehensive income if fair value increases and this increase can objectively be related to an event occurring after the write-down was carried out. Leased assets All lease agreements are classified and recorded in the Group and Parent Company as operational leases. In operational leasing, the leasing fee is expensed over the duration of the lease, on the basis of the benefit received, which can differ from the amount paid as a leasing fee during the year. Tangible assets Tangible assets are recorded at acquisition value after deduction for accumulated depreciation and any impairment, with a supplement for any appreciation. In disposal or sale, gains and losses are recorded net in operating cost. Depreciation takes place systematically over the estimated useful lives of the assets. Estimated useful lives for equipment such as cars, furniture and computer equipment amounts to 3 - 10 years. Depreciation of tangible and amortisation of intangible assets Impairment testing of, tangible and intangible assets and, participations in subsidiaries and associated companies. The reported values of the assets are tested on each balance sheet date. If any indication of an impairment requirement exists, the asset's recoverable amount is estimated in accordance with IAS 36. An impairment loss is recognised when the reported value of an asset or cash-generating unit exceeds its recoverable amount. An impairment loss is recognised in the income statement. The impairment of assets related to a cash-generating unit is primarily allocated to goodwill. The proportional impairment of other assets included in the unit is subsequently performed. The recoverable amount is the highest of fair value less selling expenses and value in use. In the calculation of value in use, future cash flow is discounted by a discount factor that considers the risk-free interest rate and the risk associated with the specific asset. Reversal of impairment An impairment is reversed if an indication exists both that the impairment requirement no longer exists and that a change has taken place in the as- sumptions forming the basis of the estimation of the recoverable amount. However, the impairment of goodwill is never reversed. Reversals are only performed to the degree that the asset's reported value after reversal does not exceed the reported value that should have been reported, with deduc- tion for depreciation or amortisation when appropriate, if no impairment had been carried out. Share capital Dividends Dividends are recorded as liabilities after approval of the dividend by the General Meeting of Shareholders. Other provisions A provision is recognised in the balance sheet when the Company has an existing legal or constructive obligation as a result of past events, when it is likely that an outflow of resources will be required to settle the obligation and when the amount can be estimated reliably. In cases in which the date of payment has a material effect, the amount of the provision is calculated via the discounting of the expected future cash flow to an interest rate before taxes which reflects the relevant market assessments of the effect of the time value of money and, if applicable, the risks associated with the liability. Pensions and similar commitments The Group companies’ pension plans differ. The pension plans are usually financed through payments to insurance companies or managed funds. These payments are determined based on periodic actuarial calculations. The Group has both defined benefit and defined contribution pension plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate legal entity. The Group has no legal or constructive obligations to pay further contributions if this legal entity does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a pension plan that is not a defined contribution plan. A characteristic of de- fined benefit plans is that they indicate an amount for the pension benefit an employee receives after retirement, usually based on one or several factors, such as age, duration of employment and salary. The liability reported in the balance sheet regarding defined benefit pension plans is the current value of the defined benefit obligation at the end of the period, less the fair value of the managed assets, with adjustments for unreported gains and losses, as well as for unreported costs for service during earlier periods. The defined benefit pension plan obligation is cal- culated annually by independent actuaries applying the so-called projected unit credit method. The current value of the defined benefit obligation is determined through discounting of expected future cash flows, with the application of the interest rate for first-class mortgage bonds issued in the same currency as that in which the remuneration will be paid, with durations comparable with that of the current pension obligation. Costs referring to service during earlier periods are reported directly in the income statement, unless the changes in the pension plan are condi- tional on the employee remaining employed during a given period (earning period). In this case, the cost referring to service during earlier periods is distributed on a straight-line basis over the earning period. For defined contribution pension plans, the Group pays fees to publicly or privately administered pension insurance plans on an obligatory, contractual or voluntary basis. The Group has no further payment obligations when all fees are paid. The fees are reported as personnel costs at the point in time at which they fall due for payment. Prepaid fees are reported as an asset to the extent that cash repayment or reduction of future payments may benefit the Group. In addition to the contracted occupational pensions safeguarded via insurance, the Company has also signed separate agreements with certain employees ensuring that these employees may terminate their service at an earlier age than 65 years of age, although no earlier than 64 years of age for an increased amount of compensation than granted by the collectively agreed pension benefits. Remuneration upon termination of employment Remuneration upon employment of contract is payable when an employee’s employment is terminated by the Group before the normal retirement age or when an employee voluntarily accepts the termination of employment in exchange for such remuneration. The Group reports severance payments when it is demonstrably obliged to terminate employees’ employment in accordance with a detailed formal plan, without possibility of revocation. In the case that the Company has submitted an offer to encourage voluntary termination of employment, the calculation of severance payment is based on the number of employees which it is estimated will accept this offer. No remuneration upon termination of employment has been paid during 2009 and 2010. Contingent liabilities A contingent liability is recognised when there is a possible obligation which arises from past events and whose existence is solely confirmed by one or more uncertain future events, or when there is a commitment which is not recorded as a liability or provision due to the fact that it is unlikely that an outflow of resources will be required. Parent Company's accounting principles The Parent Company’s annual report, as well as its financial statements in general, has been prepared using the same accounting principles and calculation methods used in the most recent annual report. 35 Annual Report 2010 Differences between accounting principles in the A total of 26.3% of the untaxed reserves can be considered as a deferred tax liability and 73.7% as shareholders' equity. The deferred tax liabilities can be described as an interest-free liability with a non-defined duration. In the group accounts, 26.3% of the untaxed reserves are allocated to defer- red tax liabilities and 73.7% to shareholders' equity. In an assessment of financial strength, the total value of the untaxed reserves is considered risk capital, as any losses can be covered, to a large extent, by the dissolution of untaxed reserves without taxes becoming payable. The largest item attributable to untaxed reserves refers to the safety reserve. The safety re- serve forms a collective security-conditioned reinforcement of the technical provisions. Accessibility is limited to loss coverage and otherwise requires official authorisation. Equalisation provision The Parent Company’s balance sheet includes an Equalisation provision within Technical provisions, and any changes for the period in this provision are reported in the income statement. The amount of the provision is calculated as the equivalent of 150% of the highest net premium income for Class 14, credit insurance, with equivalent reinsurance, for the five most recent financial years. The provisions for each financial year are equivalent to 75% of the technical surplus in the credit insurance operations. However, in the consolidated balance sheet, the Equalisation provision is allocated into deferred tax liabilities and shareholders’ equity. Group contributions and shareholders’ contributions for legal entities The Company reports group contributions and shareholders' contributions in accordance with the statements of the Emerging Issues Task Force of the Swedish Financial Accounting Standards Council (UFR2). Shareholders’ contributions are recorded directly against shareholders' equity in the receiving entity and in shares and participations in the entity providing the contribution, to the extent that no impairment is required. Group contribu- tions are recorded according to their financial significance. This implies that group contributions provided and received for the purpose of minimising the Group’s total taxes are recorded directly against retained earnings, with a deduction for the current tax effects of the contribution. Group contributions which can be seen as the equivalent of a dividend are reported as a dividend. This implies that group contributions received and their current tax effects are recorded in the income statement. Group contributions provided and their current tax effects are recorded directly against retained earnings. In the receiving entity, group contributions which can be seen as the equivalent of a shareholders' contribution are directly recorded in retained earnings, with consideration for current tax effects. The contributor records the group contribution and its current tax effects as investments in participations in the Group company, to the extent that impairments are not required. Group and the Parent Company The differences between the accounting principles in the Group and the Parent Company are presented below. The accounting principles stated below for the Parent Company have been consistently applied for all periods presented in the Parent Company’s financial statements, unless stated otherwise. Goodwill Goodwill represents the difference between acquisition cost for business acquisitions and the fair value of acquired assets, assumed liabilities and contingent liabilities. In the Parent Company, goodwill is amortised in accordance with the Swedish Annual Account Act and is reported in the balance sheet on a straight-line basis over the estimated useful life of the asset. The estimated useful life is reviewed annually. The estimated useful life for goodwill, and goodwill arising from the purchase of the net assets of a business, amounts to 20 years. Amortisation which deviates from plan is handled as an appropriation and is reported under the heading Difference between reported depreciation/amortisation and depreciation/amortisation according to plan. Subsidiaries and associated companies The Parent Company records participations in subsidiaries and associates according to the cost method. Only dividends which have been received are recognised as income, provided that such dividends derive from profits earned subsequent to the acquisition. Dividend amounts exceeding this earned profit are considered as repayment of the investment and reduce the carrying value of the participations. Anticipated dividends Anticipated dividends from subsidiaries are recorded in those cases in which the Parent Company has the sole right to make decisions regarding the amount of the dividend and the Parent Company has reached a decision on the dividend's amount before the Parent Company has published its financial statements. Taxes Untaxed reserves are recorded in the Parent Company including deferred income tax liabilities. However, untaxed reserves in the consolidated ac- counts are allocated between deferred income tax liabilities and sharehol- ders' equity. Pensions The Parent Company applies a different form of reporting of defined benefit pension plans than stipulated in IAS 19. The Parent Company’s reporting of defined benefit pension plans follows the Pension Obligations Vesting Act and the regulations of the Swedish Financial Supervisory Authority, as it is stated in RFR 2 that it is not necessary to apply the regulations in IAS 19 regarding defined benefit pension plans in legal entities. Pension costs are reported as Operational expenses in the Parent Company’s income state- ment and a provision referring to individuals with the option of retiring at the ages of 62 and 64 exists under Other provisions in the Parent Company’s income statement. Appropriations and untaxed reserves Appropriations and untaxed reserves are only recorded in the Parent Company. Taxation legislation in Sweden gives companies the option of decreasing taxable income for the year by making provisions to untaxed reserves. When applicable, untaxed reserves are set off against fiscal loss deductions or be- come subject to taxation upon resolution. In accordance with Swedish prac- tice, changes in untaxed reserves are recorded in the income statement. Provisions made to untaxed reserves are recorded in the income statement under the heading Appropriations. The accumulated value of the provisions is recorded in the balance sheet under the heading Untaxed Reserves. 36 Annual Report 2010 Note 2 • Information on risks Risk management The company’s risk management – also referred to as Enterprise risk mana- gement, ERM – is at the heart of Sirius’ thinking. Sirius defines ERM as the discipline by which Sirius assesses, controls, exploits, finances and monitors risks from all sources for the purpose of increasing Sirius’ short- and long- term value to Sirius stakeholders. ERM is, in essence, an ongoing process with the objective of creating a risk management culture that emanates from top management and which permeates throughout the entire organization. The management’s role is to communicate, implement, monitor and nurture this culture. The objectives of Sirius’ work with ERM are: • Secure existing high profitability through better risk management. • Obtain better information for strategic management decisions. • Demonstrate strong risk management vis à vis rating agencies and other interested parties. • Provide stakeholders with transparent risk management information. • Comply with Solvency II requirements. Risk strategy and the company’s risk appetite Risk strategy and risk appetite comprise the foundation of the risk manage- ment processes and risk management infrastructure. Sirius' risk strategy and risk appetite have been established by the Sirius Board which aims to secure a balance between risk, return and capital requirements. As part of the planning process, strategic limits are explicitly discussed and specified. The strategic risk appetite is expressed either in quantitative terms – for example an aggregate risk limit for windstorms in Europe – or in qualitative terms – for example in relation to operational risk. From these overall risk appetite state- ments, operational limits are successively applied at detail level throughout the organization in the form of operational risk limits, maximum risk exposure, retrocession limits, foreign exchange exposure limits, maximum equity expo- sure in the investment portfolio, etc. As part of the ERM culture, Sirius embraces the following qualitative principles: • Controlled/moderate risk taking and adequate capitalization. • All insurance transactions are to yield positive technical results. • Active use of retrocession as part of business and capital planning. • Strive for diversification. • Strong accumulation control. • Strong and independent risk control functions. • Inspire and motivate employees to further develop their risk management capabilities. Risk governance The risk management processes within Sirius are supported by a risk manage- ment infrastructure consisting of the Board of Sirius, various risk committees, risk management functions, risk control functions, policies and procedures, risk models and reporting routines. This is described in further detail in the risk sections below. Sirius’ Board of Directors is ultimately responsible for the company’s risk management strategy, risk tolerance and policies. Sirius’ Management has day-to-day responsibility for all ERM activities and it deploys this responsibility through different risk committees carrying out certain duties. A Risk Management Committee has been established in 2010 on White Mountains Re Group level. The Committee meets monthly with the objective of formalizing the oversight of critical risks, including the following risk manage- ment processes of: • Establishment of risk tolerances • Identification and management of emerging risks • Quantification and subsequent monitoring of exposures • Implementation of risk reduction/reward expansion strategies • Risk reporting Sirius’ Group Risk Management function is responsible for the coordination, monitoring, risk control and compliance of all risk areas. This function submits quarterly compliance and risk reports to the CEO, the Executive Group and to the Board of Directors. A summarizing yearly risk and governance report is submitted to the Board of Directors. Additionally, ad hoc reporting is done when deemed necessary. Internal Audit fulfils an important role in the independent evaluation of risk management and control systems. This includes the evaluation of the reliability of reporting, the effectiveness and efficiency of operations, and the compliance with laws and regulations. Sirius’ ultimate owner is listed on the New York Stock Exchange and, consequently, is required by the Sarbanes-Oxley Act, Section 404, to express an opinion on the effectiveness of internal control over financial reporting executed during the year. As part of this assessment, a thorough documenta- tion and evaluation of all processes and controls leading up to the annual report have been undertaken. This work has enabled Sirius to demonstrate compliance with the requirements of the act. Insurance risk management Goals, principles and methods A clear focus on managing insurance risks is vital for Sirius’ continued suc- cess. These risks are managed mainly by evaluating the degree of gross and net risk (after retrocession) that Sirius is willing to assume. The goal for all underwriting is to maximize profitability for each selected risk level. The anticipated profitability of each contract which is entered into shall comprise the basic ground for decision making regarding all underwri- ting. Other guiding principles include diversification, strong accumulation controls and an active use of reinsurance in order to adjust risks to acceptable risk tolerance levels. Sirius divides insurance risk management into two principal areas; under- writing risk and reserve risk. Underwriting risk Underwriting risk refers to premium and accumulation assessment, which is defined as premium risk and catastrophe risk, respectively. The underwriting risk assessment is performed by underwriters on each individual risk and the Chief Underwriting Officer is ultimately responsible for managing these risks. The insurance premiums for assumed business are to cover expected losses and expenses as well as provide a reasonable return on allocated capital. The premium risk is therefore associated with any possible level of losses deviating from expected levels. The premium risk is generally managed through the application of pricing models and underwriting procedures, but also through a reduction in under-priced business, or through declining to accept such business. If a larger, catastrophic event occurs, simultaneously impacting a large number of cedants, this may result in a single loss that could wipe out the expected annual profit, or, even consume a portion of the solvency capital. This catastrophic risk is generally managed with the assistance of underwri- ting methods and tools which monitor and control the company’s total risks, both gross and net. Catastrophe risk is also managed by the effective use of retrocession. In order to ensure consistency in the underwriting process, all underwriting within Sirius complies with specific routines. Detailed Underwriting Guidelines comprise the framework for all risk acceptances, and these guidelines contain sections regarding, for example, Limits, Underwriting Authorities and Restric- ted Business. A Four-Eyes Underwriting System, that is, a system in which at least two individuals participate in each decision, is applied for the majority of all business. The Guidelines are updated continuously and reviewed annually. There are several levels of control functions as well as technical systems, which are in place to monitor and control that underwriting policies and pro- cedures are followed. There is an underwriting control group reporting to the Chief Underwriting Officer. This group focuses in detail on how the business is 37 Annual Report 2010 underwritten and that the underwriters follow issued policies and procedures. Another group controls the underwriting system and ensures it is used cor- rectly and that input data is accurate. sed third-party model, ALPS, in which the exposure per Airline Company can be followed on-line. Within the insurance classes Accident and Trade Credit, the company has models which it has developed in-house. Reserve risk The reserving risk, i.e. the risk that insurance technical provisions will be insuf- ficient to settle incurred and future claims, is foremost handled by actuarial methods and a careful continuous review of reported claims. Provisions are made to obtain a correct balance sheet and match revenues and costs with the period in which they emerged. The amount of the provision shall correspond to the amount that is required to fulfil all expected obliga- tions and reflect the best knowledge available to Sirius. Acknowledged and appropriate methods are used in these estimations. Sirius supports its decisions on provisions by a combination of several actuarial methods, such as the Chain Ladder method, the Bornhuetter-Fergu- son method and the Benktander method. A combination of benchmarks and underwriting judgment is used for the most recent years. The provisions are further annually reviewed by independent actuaries. Regarding run-off results and claims development from previous years please refer also to Note 4 Claims incurred and Note 25 Claims Outstanding, where a specification of claims costs and expenses relating to the current year and prior years is made. Historical loss reserve trends The table below shows historical loss reserve trends. When reading the table it should be noted that amounts in other currencies are converted to the clo- sing exchange rate for 2010. The table below is thus not directly comparable to the income statement. The increases in claims costs shown in the table should be seen in relation to earned exposure. The amounts shown do not in- clude internal claims adjustment expenses. During 2004 two larger operations were acquired, that were accounted in a way that does not make amounts fully available, thus we have excluded this underwriting year. Retrocession Sirius International uses retrocession as a tool to manage risk and has a centralized unit responsible for the purchasing and administration of its outwards reinsurance. The implementation of reinsurance purchase is based on the strategic direction of the inwards portfolio, overall risk tolerance and the search for an optimal portfolio mix. Catastrophe models and other tools are used in the analytical and decision making process. Sensitivity to risks attributable to insurance agreements Within the insurance operations, property damage insurance (wind, flooding, and earthquakes) constitutes the company’s greatest risk. In order to manage this catastrophe risk, and the resulting accumulated risks, the company utili- zes a number of different models. Within Property Damage Insurance, the area with the highest level of catastrophe risk, the company utilizes a system linked to the underwriting system. In this system, all business is registered and the company’s exposure is measured via a number of predefined catastrophe scenarios. The total exposure limits per country are also registered. The primary tools, however, are the so-called catastrophe models which the company has at its disposal via licensing agreements with AIR and RMS. Based on these models, reports and analyses can be produced on a regular basis demonstrating the various degrees of likelihood of estimated claims. Everything from average claims per year to claims that are only expected to occur once every 10,000 years can be estimated using these models. Aside from the possibility of modelling single events, aggregate claims are also mo- delled. Different levels of claims can also be modelled with varying degrees of likelihood, from expected claims per year, to the worst level of annual claims in 10,000 years. Sensitivity analyses are undertaken based on a comparison of claims estimated by various models, but also through changes to the assumptions applied by the different models, such as, return periods. Concentrations and sensitivity analysis The table below shows a summary of the manner in which the company analy- ses catastrophe risks, divided by geographical area and return periods. The company analyses catastrophe risks each quarter during the financial year. The figures show the situation at the end of Q4, 2010. Sensitivity analysis – losses divided by geographical area and return periods 2010 2009 Once per Once per Once per Once per 100 years 250 years 100 years 250 years Global - Gross Global - Net Europe - Gross Europe - Net 3,331 2,313 3,251 1,320 4,424 2,654 4,424 1,729 3,584 2,635 3,507 1,888 5,136 3,050 5,136 2,854 Through the use of these simulation models, the company can obtain an esti- mation of catastrophe risk, both prior to and after retrocession. The largest single catastrophe risk in the current portfolio is a storm (“windstorm”) in Europe. An estimation of the maximum loss an individual windstorm in Europe, with a modelled return period of 250 years, is an estimated net loss of MSEK 1,729 (gross claims MSEK 4,424). In order to estimate how claims of this size affect solvency capital, the company makes an estimate of the so-called Net Financial Impact (NFI), which is based on the estimated net claims adjusted for reinstatement premiums (premium to reinstate cover after a loss) from the covered clients and from the profit from other lines of business and areas. The deficit is then compared to the solvency capital in order to find whether the losses in relation to solvency capital are within the company’s established risk tolerance. Within the area Aviation reinsurance, the company applies another licen- 38 Annual Report 2010 Claims, gross underwriting year 2004 and prior years Estimated claims: at the close of the calendar year 1 year later 2 years later 3 years later 4 years later 5 years later Current estimate of total claims Total paid 2005 2006 2007 2008 2009 2010 Total 3,222 3,748 3,647 3,621 3,608 3,603 3,603 3,449 2,487 3,154 6,574 6,005 7,191 3,490 4,041 4,038 3,960 3,545 4,392 4,391 3,448 5,001 2,922 7,191 2,870 3,960 3,650 4,391 3,454 5,001 3,027 2,922 864 Claims outstanding 1) 1,327 154 4,322 310 937 1,974 2,058 11,082 Claims, net of reinsurance 2004 and underwriting year prior years 2005 2006 2007 2008 2009 2010 Total Estimated claims: at the close of the calendar year 1 year later 2 years later 3 years later 4 years later 5 years later Current estimate of total claims Total paid 2,694 3,151 3,063 3,052 3,040 3,036 3,036 2,886 2,206 2,822 2,877 2,858 2,834 3,067 3,568 3,543 3,465 3,231 3,866 3,833 2,962 3,887 2,381 2,834 2,640 3,465 3,199 3,833 3,079 3,887 2,353 2,381 739 Claims outstanding 1) 987 150 194 266 754 1,533 1,642 5,526 1) For reconciliation against Balance Sheet, see Note 25. Financial risk management Goals, principles and methods In the company’s operation various types of financial risks arise, such as market risks, credit risks and liquidity risks. In order to limit and control the risk taking in the operations, Sirius’ Board of Directors, being ultimately re- sponsible for the internal control in the company, has determined guidelines and instructions for the financial operations. The overall investment objective is to achieve consistent positive returns and to maximize long-term after-tax return on invested assets within prudent levels of risk, through a diversified portfolio of high-quality fixed income and equity investments. Sirius makes an important distinction between Policyholder Funds In- vestments and Owners’ Funds Investments. Policyholder Funds are defined as policyholder liabilities plus statutory minimum capital and surplus, less policyholder assets. Policyholder liabilities are Net Technical Reserves as defined by The Swedish Financial Supervisory Authority (FSA), Finansinspek- tionen. As regards Policyholder Funds Investments, at least 95 percent shall be invested in fixed income securities at all times. Furthermore, at least 80 percent of the fixed income portfolio must be creditworthy and liquid; i.e. consisting of securities with high credit ratings (investment grade). To limit concentration risk (the risk of large losses) the guidelines also include size limits, industry limits and rating limits. The balance of Sirius' investable assets (Owners' Funds Investments) may utilize a mixture of fixed income, equity and private investments with a focus on maximizing total return and preserving capital. Market risk Market risk is the risk that an actual value on current or future cash flows from a financial instrument varies due to changes in market prices and due to changes in their respective volatilities. There are three types of market risk: interest rate risk, currency risk and other price risk, primarily equity risk. The Market Risk Committee is responsible for the continuous mana- gement of market risks. The development of the market risks is reported within the Market Risk Committee on a monthly basis. The Committee consists of the Group Chief Financial Officer, the Company Chief Financial Officer and the Manager of Investment Accounting and Control. The company’s investment operations during 2010 yielded a return of 1 percent, expressed in SEK. During the year, the percentage of equities in the investment portfolio increased to approximately 14 percent. The table below shows the investment assets divided by class of asset, excluding deposits in companies that are reinsured by Sirius. Investment assets, Percentage split division by class of asset 2010 2009 Bonds and other interest-bearing securities Shares and participations - whereof venture capital companies Derivatives Cash and bank balances Total 79.23 11.87 1.97 1.79 7.11 100 58.29 12.11 1.47 - 29.60 100 39 Annual Report 2010 Below, the company’s exposure and sensitivity to respective market risk is described. The descriptions are made on the basis of the company’s reporting of the Traffic Light model to the Swedish Financial Supervisory Authority as per 31 December, 2010 with its sensitivity analyses in the form of stress tests and subsequent capital requirements. Interest rate risk The company is exposed to the risk that the market value on its fixed-inte- rest assets decreases as market interest rates increase, or alternatively, that the market value increases as the interest rates decrease. The level of interest rate risk increases with the asset’s duration. The following table illustrates, in absolute figures, the company’s exposure to interest rate risk in accordance with the Traffic Light model as per 31 December, 2010. Investment assets, interest rate risk according to the Traffic Light model Scenario, Corresponding Capital Reduced capital Exposure stress test basis points requirements requirements Assets in SEK Assets in EUR Assets in USD and other currencies Total 4,823 2,784 4,368 11,975 30% 25% 30% - 98 74 99 - 130 66 112 308 82 42 71 195 Equity risk The equity risk is the risk that the market value of equities will decrease as a result of factors related to the external economic climate and factors rela- ted specifically to the company in question. Equity risks are mainly mitigated by a diversification of the equity portfolio. The table below shows the equity risk in accordance with the Traffic Light model as per 31 December, 2010. Investment assets, equity risk according to the Traffic Light model Scenario, Capital capital Exposure stress test requirements requirements Reduced Swedish shares and participations Foreign shares and participations Foreign stock warrants Foreign associated companies Total - 1,804 249 2,191 4,244 - 35% 75% 35% - - 632 186 767 - 400 118 486 1,585 1,004 Currency risk Currency risk arises if assets and liabilities in the same foreign currency vary in amounts. A Currency Committee is established and meets at least monthly in order to monitor the currency exposure and to limit the currency risk. Besides that, it is the responsibility of the Currency Committee to review and update the Currency Risk Policy and ensure it is approved by the Board of Directors on a yearly basis. The Currency Committee consists of the same members as the Market Risk Committee. Sirius’ total net currency exposure is divided into two categories, exposure related to Policyholders Funds, which is matched with the cor- responding assets, and exposure related to Owner’s Funds. Sirius’ net Po- licyholders Funds exposure for currency risk is marginal as the company’s objective for managing currency risk is to match net insurance liabilities in foreign currency with corresponding assets within very tight time frames. The company’s total net exposure for currency risk, i.e. including both Policyholder and Owners Funds, before and after any hedging by derivatives is shown in the table below. 40 Annual Report 2010 Exchange rate exposure – Group Shares and participations Bonds and other interest-bearing securities Other financial investment assets Other assets and liabilities, net Total assets Technical provisions, net Total liabilities and provisions USD 4,182 3,539 715 1,749 2010 EUR 100 2,866 185 130 10,185 3,281 -4,644 -1,578 -4,644 -1,578 Net exposure before financial hedging with derivatives 5,541 1,703 Nominal value currency forwards -1,676 - Net exposure after financial hedging with derivatives 3,865 1,703 GBP Other USD EUR GBP Other 2009 - 706 30 -29 707 -139 -139 568 - 568 - 233 93 46 3,514 4,338 114 971 1,395 2,176 1,971 289 0 143 39 -41 372 11,218 3,550 141 -301 -301 5,323 1,763 5,323 1,763 141 141 71 5,895 1,787 - 71 - - 5,895 1,787 0 - 0 0 0 38 38 76 66 66 10 - 10 In below table, the effect on the company’s shareholders’ equity and income statement of two stress tests are shown: An unfavourable foreign exchange rate move of 25 basis points, in the respective foreign currencies towards SEK and an unfavourable change to foreign exchange rates by 10 percent in the respective foreign currencies towards SEK. The analysis below assumes that the changes in exchange rates do not affect other risk parameters, such as interest rate. The sensitivity analysis takes into consideration existing financial hedges with currency related derivatives. Sensitivity analysis per currency USD EUR GBP Other Total 2010 2009 Change 25 basis points Change 10% Change 25 basis points Change 10% 203 387 205 590 47 170 43 178 14 57 0 0 - 7 - 1 264 621 248 769 Credit risk Credit risk, or counterparty risk, refers to the risk that the company will not receive agreed payment and/or will make a loss due to the counterparty’s inability to fulfil its obligations. A substantial portion of the credit risk to which the company is exposed, arises as a result of established reinsurance agreements. Credit risk in investment management The company’s policy in the investment management is to allow only invest- ments in securities with high credit quality. The credit/counterparty risk in this part of the operations is therefore assessed to be relatively limited, except for the price effects on securities arising due to increases in credit risk spreads as a result of turbulence in the credit and financial markets. The table below shows the exposure of Sirius´ investment assets divided per class of asset. Exposure - Group 2010 2009 Bonds & other interest-bearing assets - Governments - Swedish mortgage institutions - Other Swedish issuers - Other issuers Shares & participations Derivatives Total 12,067 7,608 - 102 4,357 1,808 273 8,662 5,305 103 104 3,150 1,797 - 14,148 10,459 41 Annual Report 2010 The table below lists the ten largest holdings. The table includes corporate bonds and shares and participations and excludes government bonds and other similar interest-bearing securities as well as Shares and participations in associated companies. Name of security Type of security Market value % of financial Symetra Share/Warrant OneBeacon Insurance Group Ltd Prospector Offshore Fund Pentelia Ltd Ironshore Inc Atlas Copco AB JP Morgan Chase BAA Funding Ltd Casino Guichard Perrach SES Global Americas Holding Total Share Share Share Share Bond Bond Bond Bond Bond assets 4.4 4.0 2.3 1.1 0.7 0.7 0.6 0.5 0.4 0.4 618 561 330 161 106 102 83 71 60 60 2,152 15.2 The tables below show fixed income investments and equity investments per geographical area and credit rating classes. Fixed income investments are also presented per sector. Group and/or parent company Credit quality on classes of investment assets, % 2010 AAA AA Bonds and other interest-bearing securities 70 - Swedish government - Swedish mortgage institutions - Other Swedish institutions - Foreign governments - Other foreign issuers 100 - 0 95 22 2 0 - 0 0 7 A 14 0 - 100 5 33 BBB 14 0 - 0 0 37 BB Total 0 0 - 0 0 1 100 100 - 100 100 100 AAA 74 100 100 0 99 33 AA 3 0 0 0 1 7 2009 A 10 0 0 100 0 25 BBB 13 0 0 0 0 34 BB 0 0 0 0 0 1 Total 100 100 100 100 100 100 2010 17.12 59.84 23.04 100 2010 29.02 28.40 40.01 2.57 100 2010 63.05 - 0.85 2009 25.85 72.28 1.87 100 2009 11.65 48.75 38.69 0.91 100 2009 61.26 1.18 1.20 36.10 36.36 100 100 Equity investments, divided by geographical area % Western Europe North America Other Total Interest-bearing investments, divided by geographical areas % Western Europe North America Scandinavia Other Total Interest-bearing investments, divided by sector % Governments Swedish mortgage institutions Other Swedish issuers Other foreign issuers Total 42 Annual Report 2010 Credit risk on receivables with reinsurers The credit risk resulting from reinsurance ceded by Sirius can be divided into two separate components; reinsurers’ share of technical provisions as recorded on an ongoing basis under assets in the balance sheet, and the potential exposure that would emerge in the event of large claims in the insurance portfolio, for example, in the case of a severe European wind- storm. An event like this would trigger major portions of Sirius’ purchased reinsurance cover. To manage the risk of reinsurer insolvency, Sirius’ Security Commit- tee assigns and monitors ratings of all counterparties according to Sirius internal rating scale and model for reinsurance counterparty analysis. For each rating there is a corresponding maximum limit for the total exposure per reinsurer and per program. If the credit worthiness of a retrocessionaire deteriorates into unac- ceptable status (in bankruptcy, liquidation, insolvent run-off, scheme of arrangement, or is, by other reasons, deemed to be unable or unwilling to honour its obligations), the counterparty is classified as an IDC company (Insolvent or Doubtful Company). Counterparties which are classified as IDC companies are regularly monitored by the company’s Credit Control Committee. For IDC companies, a provision is made to a credit risk reserve, which is established based on the company’s Bad Debt Reserving Policy. The credit risk reserve for these bad debts amounted, as per 31 December, 2010, to MSEK 56 (2009 MSEK 65). Ageing balances Receivables regarding both direct insurance as well as assumed rein- surance are followed up on a monthly basis and outwards reinsurance receivables are followed-up on a quarterly basis. Outstanding receivables are analyzed on the basis of the length of time that has passed since the due date with the following distribution: Less than 1 month, 1-3 months, 3-6 months, 6-9 months, 9-12 months and over 1 year. These analyses comprise the basis for various collection activities, as does the supporting documentation regarding the assessment of the counterparty’s credit risk status and any write-down requirements. In accordance with Sirius’ policy for write-downs of receivables outstan- ding for more than 1 year, there is a specific reserve for counterparties which are not classified as IDC companies which total MSEK 10. Due for <1 Month 1-3 Months 3-6 Months 6-9 Months 9-12 Months >1 Year Total 2010 2009 Net receivables Net receivables 106 119 59 52 23 -1 -8 1 -6 -6 24 64 198 229 Retrocession credit risk Reinsurers’ share of technical provisions consists of outstanding claims including IBNR reserves, as well as a provision for unearned premiums and remaining risks. The total amount as per 31 December, 2010 was MSEK 6,052. The credit rating distribution for this exposure is shown in the table below. Rating – 2010 Percentage 2009 Percentage Standard & Poor's Gross Collateral Net split Gross Collateral Net split 124 0 64 56 413 152 94 10 639 344 4,156 6,052 0 0 0 0 0 0 63 0 10 101 4,156 4,330 124 0 64 56 413 152 31 10 629 243 0 2 0 1 1 7 2 1 0 11 6 69 1,722 100 137 0 43 34 387 70 148 5 756 130 2,720 4,430 0 0 0 0 0 0 33 0 107 0 2,702 2,860 137 0 43 34 387 70 115 5 649 130 0 157 3 0 1 1 9 2 3 0 17 3 61 100 AAA AA+ AA AA- A+ A A- BBB+ BBB or lower Special approval Internal reinsurance Total 43 Annual Report 2010 In the item Internal reinsurance above the majority of ceded reinsurance refers to White Mountains Life Re. This receivable is 100% guaranteed with investment assets. Except for the credit exposure above, reported as an asset in the balance sheet, significant credit losses can potentially arise from large claims. Such credit losses can arise if two different events occur at the same time, that is, if a large catastrophe event occurs at the same time as a reinsurer to which Sirius has ceded business defaults. The table below describes the assumed liabilities from Retrocessionaires (excluding costs for reinstatements) and the distribution of credit ratings for Sirius’ 2010 Retrocession Program. Rating – Standard & Poor's AA+ AA AA- A+ A A- BBB+ BBB or lower Fully collateralized Special approval Sum 2010 Percentage split 2009 Percentage split 23 649 539 946 123 1,336 60 2 164 68 1 17 14 24 3 34 1 0 4 2 80 484 268 993 125 739 56 55 115 106 3 16 9 33 4 24 2 2 4 3 3,910 100 3,021 100 Liquidity risk Liquidity risk is the risk that the company will have difficulties fulfilling payment obligations, mainly those related to insurance liabilities. Liquidity risk can also be expressed as the risk of loss or impaired earning potential as a result of the company not being able to fulfil payment obligations in due time. Liquidity risks arise as assets and debts including derivatives instruments have different durations. The company’s strategy for dealing with liquidity risk aims to, in the greatest extent possible, match expected payments and receipts of payment (so called asset-liability management, ALM). This is accom- plished through advanced liquidity analysis of financial assets and insurance liabilities. At the end of 2010, the duration of interest-bearing investment assets was 2.72 years and the duration of insurance liabilities was 1.96 years. The liquidity is monitored continuously and stress tests are performed for different scena- rios. The company’s claims payment capabilities are further strengthened with its high portion of cash and bank deposits of the total investment assets. The cash flow analysis 2010 also provides an illustration of the company’s liquidity situation. The tables below show a more detailed maturity profile for the Group in respect of both financial assets and debts. Liquidity profile – financial assets Contractual outflows 2010 On demand <3 months 3 months –1 year 1-5 years >5 years No duration Total Bonds and other interest-bearing securities (discounted amounts) Shares & participations in associated companies Shares & participations Cash & bank balances Receivables, direct insurance Receivables, reinsurance Other debts Prepaid expenses and accrued income 0 0 0 1,082 0 0 0 0 1,268 898 7,008 2,893 0 12,067 0 0 0 0 0 31 26 0 0 0 0 1,491 0 195 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,178 2,057 0 5 2,178 2,057 1,082 5 -106 1,385 32 0 63 221 Total 1,082 1,325 2,584 7,008 2,893 4,166 19,058 44 Annual Report 2010 2009 On demand <3 months 3 months –1 year 1-5 years >5 years No duration Total Bonds and other interest-bearing securities (discounted amounts) Shares & participations in associated companies Shares & participations Cash & bank balances Receivables, direct insurance Receivables, reinsurance Other debts Prepaid expenses and accrued income 0 0 0 4,383 0 0 15 0 1,017 404 5,162 2,079 0 0 0 0 0 719 23 0 0 0 0 1,461 0 152 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,185 1,797 0 10 19 36 0 8,662 2,185 1,797 4,383 10 1,480 770 175 Total 4,398 1,759 2,017 5,162 2,079 4,047 19,462 Liquidity profile - financial debts Contractual outflows 2010 On demand <3 months 3 months–1 year 1-5 year >5 years No duration Total Payables, direct insurance Payables, reinsurance Other debts Accrued expenses and deferred income Total 0 0 0 0 0 0 0 74 69 143 0 590 481 81 1,152 0 0 38 42 80 0 0 0 1 1 2 -116 0 0 2 474 593 193 -114 1,262 2009 On demand <3 months 3 months–1 year 1-5 year >5 years No duration Total Payables, direct insurance Payables, reinsurance Other debts Accrued expenses and deferred income Total 0 0 0 0 0 0 0 102 78 180 0 556 485 50 1,091 0 0 39 29 68 0 0 0 0 0 14 -43 0 0 -29 14 513 626 157 1,310 Liquidity profile – technical provisions Estimated claim payments, net, excluding ULAE Technical provisions <3 months 3 months–1 year 1-5 year >5 year Total 2010 2009 647 717 1,966 2,183 2,842 3,062 939 964 6,394 6,926 45 Annual Report 2010 Operational risk management Sirius has defined operational risks as “The risk of losses due to defective or inappropriate internal processes and routines, human errors, defective systems or external events, including legal risk”. All employees within Sirius are responsible for the contribution to a well functioning process for operational risk management and shall see themselves as risk managers. The Group Risk Management function for Risk Control is a group function responsible for developing and improving the opera- tional risk methodology and thereby supporting the organiza- tion and the process owners with the tools needed to manage these risks. During 2010 the framework for Operational Risk Management and Incident Reporting was approved by Sirius’ Board of Directors and implemented within the organization. The implementation will continue during 2011 with information and training for all Sirius employees. Operational risks within Sirius are e.g. identified through regularly conducted Risk Control & Compliance Reviews. Other helpful sources are the continuously updated process narratives and flowcharts where any gaps or operational risks are visualized and can be mitigated. Operational risks are also identified and managed by defining controls within the proces- ses and through follow up and testing of the effectiveness of the key controls. Sirius’ operational risks shall be reduced to acceptable levels based on the pre-defined risk appetite, taking into account the cost-benefit considerations of risk mitigation. Compliance risk management Compliance risk is “the risk of legal or regulatory sanctions, material financial loss or loss to reputation that Sirius may suffer as a result of not complying with laws, internal or external regulations and administrative provisions as applicable to Sirius activities.” The responsibility for Sirius’ compliance with internal and external regulation lies with all employees. Compliance risks are identified by all employees on an ad hoc basis and more formally through the Risk Control & Compliance Reviews. The Compliance function supports the organization and processes by informing and advising but also by monitoring compliance issues throughout the group. Sirius has a very conservative approach towards compliance risks and risk mitigation is encouraged. A well functioning and structured process for managing and monitoring these risks is therefore essential for Sirius. During 2010 a Compliance Risk Management Framework was Total capital requirement according to the Traffic Light model 2010 2009 Total capital net requirement Capital buffer Surplus 3,626 12,534 8,908 3,919 12,567 8,648 approved by the Board of Directors and the implementation process, covering head office and all branches, is underway and will continue during 2011. Solvency and capital requirements Sirius is preparing for compliance with the Solvency II regulation. As part of this, and as a test of the standard solvency capital requirement formula, the company has participated in the Quanti- tative Impact Study (QIS) 5. Sirius has been working extensively with the implementation of an Economic Risk Capital (ERC) Model. Objectives for the ERC model are: • Consolidating quantifiable risks into one model • Producing a realistic distribution of financial outcomes various return periods • Allocating capital to key risks, business units and lines of business units more consistently • Addressing Solvency II Pillar I and II issues • Streamlined and inclusive view of interdependencies of these risks • Stochastically calculate economic capital Practical applications of the ERC model include: • Enhancing capital management and allocation • More efficient retrocession purchases • Streamlining catastrophe accumulation reporting for planning and actual PML reporting • Group-wide risk adjusted performance measurement The company has furthermore decided to enter into the Internal Model Approval Process with the company’s regulator, the Swe- dish FSA. The goal is to gain approval to replace the standard model with the company’s internal Economic Risk Capital Model solvency capital calculations under Solvency II. As a predecessor to Solvency II, the Swedish FSA has established a local solvency regulation, the Traffic Light system. It takes into account the company’s risks in the areas financial risks, insurance risk and operating expense risk. The model results in a total capital net requirement which is compared to a so called buffer capital (“solvency capital”) in order to asses the company’s capital strength. The table below shows the result in accordance with the Traffic Light model as per 31 December, 2009 and 2010. Financial strength rating The financial strength of Sirius International has been rated by Standard & Poor’s, A M Best and Moody’s. Financial strength rating as per 31 December 2010 2009 S&P’s A M Best Moody’s S&P’s A M Best Moody’s Financial strength rating Outlook A- Stable A Stable A3 Stable A- A Stable Negative A3 Stable 46 Annual Report 2010 Note 3 • Premium income Premium income, geographical allocation Group Parent Company Direct insurance, Sweden Direct insurance, other EES Direct insurance, other countries Premiums for accepted reinsurance Premium income before ceded reinsurance Premium for ceded reinsurance Premium income after ceded reinsurance 2010 8 197 674 6,516 7,395 -1,787 5,608 Note 4 • Claims incurred, for own account Claims incurred for the year´s operations 2009 2010 2009 8 128 684 7,810 8,630 -1,673 6,957 8 128 684 7,810 8,630 -1,673 6,957 8 197 674 6,516 7,395 -1,787 5,608 Group 2010 2009 Gross Ceded Net Gross Ceded Net Claims paid Loss portfolios Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) Claims handling expenses Total claims incurred for the year’s operations -952 39 -1,254 -942 -175 -3,284 Claims incurred for previous year’s operations 137 0 331 114 0 582 2010 -815 39 -923 -828 -175 -1,401 59 -1,563 -981 -168 -2,702 -4,054 Group -1,311 59 -1,265 -806 -168 -3,491 90 0 298 175 0 563 2009 Gross Ceded Net Gross Ceded Net Claims paid Loss portfolios Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) Total claims incurred for previous year’s operations -3,277 -63 1,033 -432 -2,739 800 0 83 1,130 2,013 -2,477 -3,001 -63 1,116 698 -726 268 1,124 1,214 -395 337 4 -84 -535 -278 -2,664 272 1,040 679 -673 Total claims incurred -6,023 2,595 -3 428 -4,449 285 -4,164 Total claims paid Claims paid Loss portfolios Claims handling expenses Total claims paid 2010 2009 Group Gross Ceded Net Gross Ceded Net -4,229 -24 -175 -4,428 937 -3,292 -4,402 427 -3,975 0 0 -24 -175 327 -168 4 0 331 -168 937 -3,491 -4,243 431 -3,812 Change in Provision for outstanding claims Group 2010 2009 Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) Total change in provisions for outstanding claims -221 -1,374 -1,595 414 1,244 1,658 193 -130 63 -439 233 -206 214 -360 -146 -225 -127 -352 Gross Ceded Net Gross Ceded Net 47 Annual Report 2010 Claims incurred for the year’s operations Parent Company Claims paid Loss portfolios Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) Claims handling expenses Total claims incurred for the year’s operations Gross -952 39 -1,254 -942 -175 -3,284 2010 Ceded 137 0 331 114 0 582 Net Gross -815 39 -923 -828 -175 -1,401 59 -1,563 -981 -168 -2,702 -4,054 Claims incurred for previous year’s operations Parent Company Claims paid Loss portfolios Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) Total claims incurred for previous year’s operations Gross -3,264 -63 1,027 -432 -2,732 2010 Ceded 800 0 83 1,130 2,013 Net Gross -2,464 -63 1,110 698 -719 -3,001 268 1,124 1,214 -395 2009 Ceded 90 0 298 175 0 563 2009 Ceded 337 4 -84 -535 -278 Net -1,311 59 -1,265 -806 -168 -3,491 Net -2,664 272 1,040 679 -673 Total claims incurred -6,016 2,595 -3,421 -4,449 285 -4,164 Total claims paid Parent Company Claims paid Loss portfolios Claims handling expenses Total claims paid Gross -4,216 -24 -175 -4,415 2010 Ceded Net Gross 2009 Ceded Net 937 -3,279 -4,402 427 -3,975 0 0 -24 -175 327 -168 4 0 331 -168 937 -3,478 -4,243 431 -3,812 Change in provision for outstanding claims Parent Company Change in provision for incurred and reported claims Change in provision for incurred but not reported claims (IBNR) Total change in provision for outstanding claims Gross -227 -1,374 -1,601 2010 Ceded 414 1,244 1,658 Net Gross 187 -130 57 -439 233 -206 2009 Ceded 214 -360 -146 Net -225 -127 -352 48 Annual Report 2010 Note 5 • Operating costs Specification of income statement item operating costs Group Parent Company 2010 2009 2010 2009 Acquisition costs -1,494 -1,673 -1,493 -1,673 Change in prepaid acquisition costs (+/–) Administrative expenses Provisions and profit shares in ceded reinsurance (–) -5 -475 284 86 -451 283 -5 -473 284 86 -457 283 Total operating costs -1,690 -1,755 -1,687 -1,761 Other operating costs Group Parent Company 2010 2009 2010 2009 Operating costs Claims handling expenses included in claims paid Costs for treasury mgmt. incl. in Return on capital, costs Costs for property mgmt. incl. in Return on capital, net -1,690 -175 -53 -5 -1,755 -168 -41 -3 -1,687 -175 -51 -5 -1,761 -168 -41 -3 Total other operating costs -1,923 -1,967 -1,918 -1,973 Total operating costs per type Group Parent Company 2010 2009 2010 2009 -429 -50 -17 -1,427 -1,923 -368 -47 -8 -1,544 -1,967 -418 -48 -16 -1,436 -1,918 -354 -46 -8 -1,565 -1,973 Direct and indirect personnel costs Premises costs Depreciation/amortisation Other expenses related to operations Total other operating costs Note 6 • Investment income Group Parent Company 2010 2009 2010 2009 Dividend income from: Foreign shares and participations Interest income Bonds and other interest-bearing securities Other interest income 153 313 25 - of which from financial assets not valued at fair value with changes in value reported in the income statement 0 Capital gains and reversed write-downs (net) Swedish shares Foreign shares Interest-bearing securities Total return on capital, income 0 25 107 623 45 329 46 46 1 0 0 421 206 312 25 0 0 6 100 649 9 329 46 46 1 0 0 385 49 Annual Report 2010 Note 7 • Unrealised gains on investments Total operating costs per type Group Parent Company 2010 2009 2010 2009 Foreign shares and participations Share of income in associated company 1) Derivative financial instruments Total unrealised gains on investments 243 125 29 397 365 270 0 635 155 0 29 184 228 0 0 228 1) Refers to the Group´s share of income in associated company, WM Phoenix. The currency translation differences arising in the conversion to Swedish krona is reported in other comprehensive income (-133). Note 8 • Investment expenses and charges Operating expenses for land and buildings Asset management costs Interest expenses Other interest expenses - of which from financial assets not valued at fair value with changes in value reported in the income statement Group Parent Company 2010 2009 2010 2009 -5 -54 -3 0 -3 -43 -1 -1 -5 -51 -3 0 -3 -43 -1 -1 Capital losses on foreign exchange, net -394 -258 -398 -244 Capital losses Foreign shares and participations Subsidiaries and associated companies Bonds and other interest-bearing securities Derivative financial instruments Total 0 0 0 -10 -466 -35 0 -30 0 0 -185 0 0 -34 0 -30 0 -370 -642 -355 Note 9 • Unrealised losses on investments Group Parent Company 2010 2009 2010 2009 Foreign shares and participations Derivatives, forward exchange agreements Total unrealised losses on investments -92 -13 -105 -28 0 -28 -92 -13 -105 -28 0 -28 50 Annual Report 2010 Note 10 • Net profit or net loss per category of financial instruments Group 2010 Financial assets identified as items valued Loan at fair value in Available-for- receivables the income sale financial and accounts Financial assets statement instruments receivables Total Shares and participations Derivative financial instruments Bonds and other interest-bearing securities Deposits with cedants Other debtors Total 328 7 0 0 0 335 0 0 287 0 0 287 Parent Company 2010 Financial assets identified as items valued 328 7 287 19 6 647 0 0 0 19 6 25 Loan at fair value in Available-for- receivables the income sale financial and accounts Financial assets statement instruments receivables Total Shares and participations Derivative financial instruments Bonds and other interest-bearing securities Deposits with cedants Other debtors Total Group 2009 276 17 0 0 0 293 0 0 279 0 0 279 Financial assets identified as items valued 276 17 279 19 6 597 0 0 0 19 6 25 Loan Financial assets statement instruments receivables Total at fair value in Available-for- receivables the income sale financial and accounts Shares and participations Bonds and other interest-bearing securities Deposits with cedants Other debtors Total 575 0 0 0 575 0 478 0 0 478 Parent Company 2009 Financial assets identified as items valued 575 478 22 7 1,082 0 0 22 7 29 Loan Financial assets statement instruments receivables Total at fair value in Available-for- receivables the income sale financial and accounts Shares and participations Bonds and other interest-bearing securities Deposits with cedants Other debtors Total 166 0 0 0 166 0 478 0 0 478 0 0 22 7 29 166 478 22 7 673 The amounts in the table above constitute a specification of the amounts regarding financial instruments which are reported in the income statement as (i) return on capital, income, (ii) unrealised gains, (iii) return on capital, expenses, (iv) unrealised losses, with exception for (a) potential amortisation and write-downs, (b) asset management costs and (c) exchange rate gains/losses. Currency exchange losses amount to 394 (258) for the Group, of which 658 (639) refer to exchange rate losses on financial assets. Exchange rate gains on liabilities and other assets amount to 264 (381). As the Company has no financial liabilities generating interest expenses, these have not been specified in the above table; neither does the tables include interest income from Cash and bank. 51 Annual Report 2010 Note 11 • Taxes Current tax expense (-)[/tax revenue (+)] Current tax expenses Tax adjustment attributable to previous years Deferred tax expense (-)[/tax revenue (+)] Deferred tax regarding temporary differences Total reported tax expense Reconciliation of effective tax Group Parent Company 2010 2009 2010 2009 -189 0 -5 -194 -187 -4 -113 -304 -185 0 -4 -189 -185 -4 18 -171 Reconciliation of effective income tax rate for the Group and Parent Group Parent Company Company to the Swedish income tax rate 2010 2009 2010 2009 Tax according to applicable tax rate for the Parent Company -26.3% -26.3% -26.3% -26.3% Non-deductible expenses Non-taxable income Tax regarding previous years Reported effective tax -5.3% 13.5% 0% -0.3% 8.4% -1.0% -7.7% 7.5% 0% -0.3% 3.2% -2.4% -18.1% -19.2% -26.5% -25.8% Result before tax for the Parent Company refers to profit after transfer to safety reserve. The total provision for 2010 amounts to 0 (511). Reported deferred tax receivables and tax liabilities Reported deferred tax receivables and tax liabilities related to the following: Group Deferred tax assets Deferred tax liabilities Net 2010 2009 2010 2009 2010 2009 Personnel-related provisions Other provisions Surplus value of securities Safety reserve and accelerated depreciation Net tax receivables/net tax liabilities 19 12 3 0 34 10 16 0 0 26 0 -4 0 -3 -1 -22 2 25 3 7 15 -22 -2,549 -2,553 -2,549 -2,575 -2,549 -2,519 -2,549 -2,549 Parent Company Deferred tax assets Deferred tax liabilities Net 2010 2009 2010 2009 2010 2009 Personnel-related provisions Other provisions Surplus value of securities Net tax receivables/net tax liabilities 20 12 3 35 10 15 0 25 0 0 0 0 0 0 -21 -21 3 29 3 35 10 15 -21 4 Unreported deferred tax receivables There are no deductible temporary differences and fiscal loss carry forward for which deferred tax receivables have not been reported in the income statement and balance sheet. Group Parent Company Changes in deferred tax 2010 2009 2010 2009 Opening balance Recognised in income statement Recognised in shareholders’ equity Closing balance -2,549 -2,400 -5 35 -113 -36 -2,519 -2,549 4 -4 35 35 21 18 -35 4 Taxes recognised in shareholders’ equity mainly refers to available-for-sale financial assets 35 (-35). There is no loss carry-forward included in the change of deferred tax. 52 Annual Report 2010 Note 12 • Intangible assets Group Parent Company Intangible assets Acquired Intangible assets Acquired –IT Capitalised intangible –IT Capitalised intangible expenditurer for assets expenditurer for assets development work Goodwill 1) Total development work Goodwill 1) Total Accumulated acquisition value Opening balance 1 January, 2009 Acquisitions for the year Closing balance 31 December, 2009 Opening balance 1 January, 2010 Acquisitions for the year Closing balance 31 December, 2010 Accumulated amortisation Opening balance 1 January, 2009 Depreciation for the year Closing balance 31 December, 2009 Opening balance 1 January, 2010 Depreciation for the year Closing balance 31 December, 2010 Carrying amount Per 1 January, 2009 Per 31 December, 2009 Per 1 January, 2010 Per 31 December, 2010 Amortisation for the year is included in the following rows of the income statement for 2009: Operating costs Other costs Total Amortisation for the year is included in the following rows of the income statement for 2010: Operating costs Other costs Total 66 5 71 71 22 93 -65 -1 -66 -66 -5 -71 1 5 5 22 -1 0 -1 -5 0 -5 615 0 615 615 0 615 -324 0 -324 -324 0 -324 291 291 291 291 0 0 0 0 0 0 681 5 686 686 22 708 -389 -1 -390 -390 -5 -395 292 269 296 313 -1 0 -1 -5 0 -5 In the item IT-related intangible assets, acquired licenses and expenses brought forward are included for the development of business-critical systems. All intangible assets are depreciated. For information regarding the depreciations, see Note 1 "Accounting principles" 1) The Group and Parent Company goodwill derive from the acquired operation in Belgium, which is an identifiable cash genera- ting unit. The amounts refer both to acquisition- and asset deal goodwill and are annually tested for impairment. The projected future cash flows are based on a conservative assessment of the unit’s earnings, based on historical and future earning pat- terns. The forecasted profit margin is currently equal to a combined ratio of approximately 95%. 66 5 71 71 22 93 -65 -1 -66 -66 -5 -71 1 5 5 22 -1 0 -1 -5 0 -5 460 0 460 460 0 460 -231 -17 -248 -248 -4 -252 229 212 212 207 0 -17 -17 0 -4 -4 526 5 531 531 22 553 -296 -18 -314 -314 -9 -323 230 217 217 229 -1 -17 -18 -5 -4 -9 53 Annual Report 2010 Note 13 • Land and buildings Group Parent Company Acquisition cost Opening balance 1 January, 2009 Closing balance 31 December, 2009 Opening balance 1 January, 2010 Closing balance 31 December, 2010 Depreciation Opening balance 1 January, 2009 Depreciation for the year Closing balance 31 December, 2009 Opening balance 1 January, 2010 Depreciation for the year Closing balance 31 December, 2010 Carrying amount Per 1 January, 2009 Per 31 December, 2009 Per 1 January, 2010 Per 31 December, 2010 18 18 18 18 -14 -2 -16 -16 0 -16 4 2 2 2 18 18 18 18 -14 -2 -16 -16 0 -16 4 2 2 2 The Parent Company holds three properties, located in Sweden and Belgium. Sirius International accounts for the properties, including building supplies, according to the acquisition value method and the capitalised expenses are depreciated over 50 and 10 years, respectively. No depreciation is performed on land. Assessed value Group Parent Company 2010 2009 2010 2009 Assessed value, buildings (in Sweden) Assessed value, land (in Sweden) Total 2 1 3 2 1 3 2 1 3 2 1 3 Note 14 • Shares and participations in group companies Name of subsidiary Registered offices, country Participating interest % Sirius Rückversicherungs Service GmbH Hamburg, Germany Sirius Belgium Réassurances S.A. (in liquidation) Liège, Belgium Sirius International Holdings (NL) B.V. Amsterdam, The Netherlands White Mountains Re Bermuda Ltd Hamilton, Bermuda Accumulated acquisition cost Beginning of year Acquisition Disposals Capital contribution Repayment of paid-up capital Closing balance 31 December Accumulated write-downs Beginning of year Acquisition Disposals Write-downs for the year Closing balance 31 December Carrying amount 31 December 54 2010 2009 100 100 100 100 100 100 100 0 2010 2009 1,252 1,252 728 0 388 -506 0 0 0 0 1,862 1,252 -596 -596 0 0 -185 -781 1,081 0 0 0 -596 656 Annual Report 2010 Subsidiaries’ shareholders’ equity 2010 Name of subsidiary Shareholders’ equity Shares % Number of shares Book value Profit/loss Sirius Rückversicherungs Service GmbH, 12 100 1 share nom. value EUR 51,129 Hamburg, Germany Sirius Belgium Réassurances S.A. (in liquidation), Liège, 12 100 Share capital total EUR 1,245,681 consisting of Belgium 700,000 shares without nom. value 0 13 -2 0 Sirius International Holdings (NL) B.V 1,045 100 Share capital total EUR 18,000 consisting of 1,032 381 Amsterdam, The Netherlands 180 shares with nom. value EUR 100 per share White Mountains Re Bermuda Ltd, 36 100 Share capital total 120,000 USD consists of 36 -143 Hamilton, Bermuda 120,000 shares nom. value USD 1 per share 1,105 - 100 1,081 236 Total 2009 Name of subsidiary Shareholders’ equity Shares % Number of shares Book value Profit/loss Sirius Rückversicherungs Service GmbH, 18 100 1 share nom. value EUR 51,129 Hamburg, Germany Sirius Belgium Réassurances S.A. (in liquidation), Liège, 14 100 Share capital total EUR 1,245,681 consisting Belgium of 700,000 shares without nom. value 0 13 5 0 Sirius International Holdings (NL) B.V., 592 100 Share capital total EUR 18,000 consisting of 643 157 Amsterdam, The Netherlands 180 shares with nom. value EUR 100 per share Total 624 100 656 162 55 Annual Report 2010 Note 15 • Shares and participations in associated companies Carrying amount at beginning of the year Share of associated company’s profit/loss 1) Foreign exchange effect Carrying amount at end of year Carrying amount at beginning of the year Acquisition of associated company Carrying amount at end of year Group 2010 2009 2,185 125 -132 2,178 2,101 270 -186 2,185 Parent Company 2010 2009 2,058 0 2,058 2,058 0 2,058 Name of associated companies Assets Liabilities Shareholders’ equity Net income Share of capital % 2) Number of shares White Mountains Phoenix S.a.r.l., Luxemburg Total 20,166 20,166 11,355 11,335 8,811 8,811 533 533 24.7 24.7 2,461,000 2,461,000 1) Refers to the Group's share of income in the associated company, White Mountains Phoenix. The translation of the exchange rate difference arising in the conversion to Swedish krona is reported directly against shareholders´equity. 2) The participating interest in the Company’s total shareholders’ equity is equivalent to 24.7% (23.6%). The participating interest in total outstanding shares at year-end is equivalent to 22.0% (22.0%). Note 16 • Investments in shares and participations Fair value Acquisition cost 2010 2009 2010 2009 Group 1,808 1,797 1,946 2,053 Fair value Acquisition cost 2010 2009 2010 2009 Parent Company 874 1,251 940 1,352 Further information on financial instruments can be found in Note 20. 56 Annual Report 2010 Note 17 • Bonds and other interest-bearing securities Fair value Acquisition cost Group 2010 2009 2010 2009 Swedish government Swedish mortgage institutions Other Swedish issuers Foreign governments Other foreign issuers Total 4,725 0 102 2,883 4,357 12,067 3,144 466 0 2,161 2,890 8,662 4,735 0 98 2,886 4,292 12,011 3,038 456 0 2,152 2,815 8,462 Of which listed 12,067 8,662 12,011 8,462 Average difference compared to nominal value Total excess amount Total shortfall 622 40 461 33 549 24 263 35 Fair value Acquisition cost Parent Company 2010 2009 2010 2009 Swedish government Swedish mortgage institutions Other Swedish issuers Foreign governments Other foreign issuers Total 4,725 0 102 2,883 4,357 12,067 3,144 466 0 2,161 2,890 8,662 4,735 0 98 2,886 4,292 12,011 3,038 456 0 2,152 2,815 8,462 Of which listed 12,067 8,662 12,011 8,462 Average difference compared to nominal value Total excess amount Total shortfall 622 40 461 33 549 24 263 35 Note 18 • Derivatives Group Parent Company Derivatives 2010 2009 2010 2009 Derivatives with underlying security shares Derivatives with underlying security currency Total 249 24 273 0 0 0 0 24 24 0 0 0 Derivatives with underlying security in currency refer to a currency hedge of MUSD 250 against SEK. As at 1 January, 2010, the company had entered into an internal currency hedging agreement with White Mountains Re Financial Services Ltd (WMReFS). This agreement implies that Sirius International has sold MUSD 250 on the basis of a currency futures transaction to WMReFS with a dura- tion of five years. With the help of foreign exchange options, the currency futures transactions are settled on the basis of an exchange rate cap of SEK 11.93 per USD, and an exchange rate floor of SEK 5.11 per USD. Outside this range, the company takes no hedging measures. The currency hedge agreement is valued monthly. Derivatives with securities in shares are exclusively warrants in Symetra. 57 Annual Report 2010 Note 19 • Other debtors Group Parent Company 2010 2009 2010 2009 Other debtors, group companies Other debtors Total other debtors 0 63 63 713 42 755 201 61 262 713 43 756 Note 20 • Categories of financial assets and liabilitities and their fair value Group 2010 Financial Loan assets valued Financial assets receivables statement assets amount Fair value value receivables and at fair value Available-for- accounts via the income sale financial Total carrying Acquisition Shares and participations Derivatives Bonds and other interest-bearing securities Accrued income Other debtors Total 0 0 0 607 63 670 1,808 273 0 0 0 0 0 12,067 0 0 1,808 273 12,067 607 63 1,808 273 12,067 607 63 1,946 266 12,599 607 63 2,081 12,067 14,818 14,818 15,481 Parent Company 2010 Financial Loan assets valued Financial assets receivables statement assets amount Fair value value receivables and at fair value Available-for- accounts via the income sale financial Total carrying Acquisition Shares and participations Derivatives Bonds and other interest-bearing securities Accrued income Other debtors Total 0 0 0 606 262 868 874 24 0 0 0 0 0 874 24 874 24 940 7 12,067 12,067 12,067 12,599 0 0 606 262 606 262 606 262 898 12,067 13,833 13,833 14,414 Group 2010 Financial liabilities liabilities amount Fair value Other financial Carrying Other liabilities Accrued expenses Total 593 193 786 593 193 786 593 193 786 Parent Company 2010 Financial liabilities liabilities amount Fair value Other financial Carrying Other liabilities Accrued expenses Total 608 192 800 608 192 800 608 192 800 58 Annual Report 2010 Group 2009 Financial Loan assets valued Financial assets receivables statement assets amount Fair value value receivables and at fair value Available-for- accounts via the income sale financial Total carrying Acquisition Shares and participations Bonds and other interest-bearing securities Accrued income Other debtors Total 0 0 0 770 770 1,797 0 594 0 0 8,662 0 0 1,797 8,662 594 770 1,797 8,662 594 770 2,021 8,622 594 770 2,391 8,662 11,823 11,823 12,007 Parent Company 2009 Financial Loan assets valued Financial assets receivables statement assets amount Fair value value receivables and at fair value Available-for- accounts via the income sale financial Total carrying Acquisition Shares and participations Bonds and other interest-bearing securities Accrued income Other debtors Total 0 0 0 756 756 1,251 0 592 0 0 8,662 0 0 1,251 8,662 592 756 1,251 8,662 592 756 1,352 8,622 592 756 1,843 8,662 11,261 11,261 11,322 Group 2009 Financial liabilities liabilities amount Fair value Other financial Carrying Other liabilities Accrued expenses Total Parent Company 2009 626 157 783 626 157 783 626 157 783 Financial liabilities liabilities amount Fair value Other financial Carrying Other liabilities Accrued expenses Total 638 157 795 638 157 795 638 157 795 59 Annual Report 2010 In the tables below, data is provided regarding the determination of fair value for financial instruments valued at fair value in the balance sheet. The determination of fair values is categorized according to the following three levels: Level 1: Based on prices listed on a active market for identical assets or liabilities Level 2: Based on directly (according to price listings) or indirectly (derived from price listings) observable market data for assets or liabilities that are not included in Level 1 Level 3: Based on input data that is not observable on the market Group 2010 Level 1 Level 2 Level 3 Total Shares and participations Derivatives Bonds and other interest-bearing securities Total 935 0 6,234 7,169 344 0 5,833 6,177 529 273 0 802 1,808 273 12,067 14,148 Parent Company 2010 Level 1 Level 2 Level 3 Total Shares and participations Derivatives Bonds and other interest-bearing securities Total 0 0 6,234 6,234 345 0 5,833 6,178 529 24 0 553 874 24 12,067 12,965 The fair value of financial instruments traded on an active market is based on the listed price on balance sheet date. A market is seen to be active in cases where listed prices from a stock exchange, broker, industry group, pricing service or supervisory authority are easily accessible, and where these prices repre- sent genuine, regularly-occurring market transactions conducted at arm’s length. The listed market price applied in determining the fair value of instruments that are to be found in Level 1 is the current buying-rate Fair value of financial instruments which are not traded on an active market are determined with the aid of valuation techniques. This procedure applies, as far as possible, such market information as is available, while information specific to a company is applied as little as possible. If all significant input data required in determining the fair value of an instrument is observable, the instrument is to be found in Level 2. Specific valuation techniques applied in valuing financial instruments include: • Listed market prices or broker listings for similar instruments. • Fair value of interest swaps is determined as the current value of estimated future cash flows, based on observable yield curves. • Fair value for currency forward exchange agreements is determi- ned through the use of exchange rates for forward exchanges on balance sheet date, at which point the resulting value is discounted to current value. • Other techniques, such as the calculation of discounted cash-flows, are applied in determining fair value for any financial instruments not covered by the above techniques. Note that all fair values determined with the aid of these valua- tion techniques are to be found in Level 2. In the event that one or more significant input data figures are not based on observable market information, the associated instrument is to be classified in Level 3. The table below shows a reconciliation of opening and closing balance data for financial instruments valued at fair value in the balance sheet, on the basis on non-observable input data (Level 3). Group 2010 Shares and Participations Derivatives Bonds Total Opening balance 1 January, 2010 Total reported profit/loss: - reported in profit/loss for the year 1) - reported in shareholders’ equity Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 3 Transfer into Level 3 Closing balance 31 December, 2010 323 -12 0 251 -33 0 0 529 0 7 0 266 0 0 0 273 Profit/loss reported in profit/loss for the year for assets included in the closing balance 31 December, 2010 1) -12 7 0 0 0 0 0 0 0 0 0 323 -5 0 517 -33 0 0 802 -5 60 Annual Report 2010 Parent Company 2010 Shares and Participations Derivatives Bonds Total Opening balance 1 January, 2010 Total reported profit/loss: - reported in profit/loss for the year 1) - reported in shareholders’ equity Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 3 Transfer into Level 3 Closing balance 31 December, 2010 323 -12 0 251 -33 0 0 529 0 17 0 7 0 0 0 24 Profit/loss reported in profit/loss for the year for assets included in the closing balance 31 December, 2010 1) -12 17 0 0 0 0 0 0 0 0 0 323 5 0 258 -33 0 0 553 5 Group and Parent Company 2009 Shares and Participations Bonds Total Opening balance 1 January, 2009 Total reported profit/loss: - reported in profit/loss for the year 1) - reported in shareholders’ equity Acquisition cost, purchase Proceeds of sale, sales Transfer from Level 3 Transfer into Level 3 Closing balance 31 December, 2009 376 -8 0 36 -81 0 0 323 0 0 0 0 0 0 0 0 376 -8 0 36 -81 0 0 323 Profit/loss reported in profit/loss for the year for assets included in the closing balance 31 December, 2009 1) -23 0 -23 1) Reported in net income of financial transactions in profit/loss for the year. 61 Annual Report 2010 Note 21 • Tangible assets Acquisition cost Opening balance 1 January, 2009 Acquisition Disposals Closing balance 31 December, 2009 Opening balance 1 January, 2010 Acquisition Disposals Closing balance 31 December, 2010 Depreciations Opening balance 1 January, 2009 Depreciation for the year Disposals Closing balance 31 December, 2009 Opening balance 1 January, 2010 Depreciation for the year Disposals Closing balance 31 December, 2010 Reported values 1 January, 2009 31 December, 2009 1 January, 2010 31 December, 2010 Group Equipment Parent Company Equipment 72 13 -5 80 80 24 -18 86 -56 -7 4 -59 -59 -12 17 -54 16 21 21 32 71 13 -5 79 79 24 -18 85 -56 -7 4 -59 -59 -12 17 -54 15 20 20 31 Note 22 • Deferred acquisition costs Opening balance Capitalisation for the year Depreciation/amortisation for the year Exchange rate gains/losses Closing balance Note 23 • Untaxed reserves Parent Company Group Parent Company 2010 2009 2010 2009 419 406 -411 -28 386 441 460 -443 -39 419 419 406 -411 -28 386 441 460 -443 -39 419 Accumulated accelerated depreciation regarding goodwill and equipment Opening balance 1 January Change for the year Exchange rate gains/losses Closing balance 31 December Safety reserve Opening balance 1 January Change for the year Closing balance 31 December Total 62 2010 2009 44 -4 0 40 9,647 0 9,647 9,687 61 -17 0 44 9,136 511 9,647 9,691 Annual Report 2010 Note 24 • Provisions for unearned premiums and unexpired risks Provisions for unearned premiums 2010 2009 Group Gross Reinsurers´ Net Gross Reinsurers´ Net Opening balance Insurance policies signed during period Earned premiums for the period Currency effect Closing balance 2,190 2,072 -2,111 -215 1,936 share -379 -419 327 68 -403 1,811 1,653 -1,784 -147 1,533 2,183 2,423 -2,179 -237 2,190 share -274 -381 235 41 -379 1,909 2,042 -1,944 -196 1,811 Provisions for unexpired risks 2010 2009 Group Gross Reinsurers´ Net Gross Reinsurers´ Net Opening balance Current year’s provisions included in profit/loss Previous year’s provisions included in profit/loss Currency effect Closing balance 140 0 -6 -8 126 share -103 0 4 6 -93 37 0 -2 -2 33 share -111 0 -1 9 -103 160 0 -7 -13 140 49 0 -8 -4 37 Provisions for unearned premiums 2010 2009 Parent Company Gross Reinsurers´ Net Gross Reinsurers´ Net Opening balance Insurance policies signed during period Earned premiums for the period Currency effect Closing balance 2,190 2,071 -2,111 -214 1,936 share -379 -419 327 68 -403 1,811 1,652 -1,784 -146 1,533 2,183 2,423 -2,179 -237 2,190 share -274 -381 235 41 -379 1,909 2,042 -1,944 -196 1,811 Provisions for unexpired risks 2010 2009 Parent Company Gross Reinsurers´ Net Gross Reinsurers´ Net Opening balance Current year’s provisions included in profit/loss Previous year’s provisions included in profit/loss Currency effect Closing balance 140 0 -6 -8 126 share -103 0 4 6 -93 37 0 -2 -2 33 share -111 0 -1 9 -103 160 0 -7 -13 140 49 0 -8 -4 37 63 Annual Report 2010 Note 25 • Claims outstanding Provisions for outstanding claims 2010 2009 Group Gross Reinsurers´ Net Gross Reinsurers´ Net Opening balance, reported claims 4,982 Opening balance, incurred but not reported claims (IBNR) 4,879 Opening balance Portfolio transfer WTM Re Bermuda Cost for claims incurred during the current year Change in estimated cost for claims incurred in previous years (close down profit/loss) Claims handling expense Paid/transferred to insurance liabilities or other current liabilities Currency affect Closing balance Closing balance, reported claims 9,861 6 3,284 2,739 175 4,253 -380 11,082 4,831 Closing balance, incurred but not reported claims (IBNR) 6,251 share -852 -3,096 -3,948 0 -582 -2,013 0 -937 50 -5,556 -1,124 -4,432 4,130 1,783 5,913 6 2,702 726 175 3,316 -330 5,526 3,707 1,819 share -698 -3,890 -4,588 0 -563 278 0 -431 494 -3,948 -852 -3,096 4,163 1,756 5,919 0 3,491 673 168 3,644 -358 5,913 4,130 1,783 4,861 5,646 10,507 0 4,054 395 168 4,075 -852 9,861 4,982 4,879 Provisions for outstanding claims 2010 2009 Parent Company Gross Reinsurers´ Net Gross Reinsurers´ Net Opening balance, reported claims 4,982 Opening balance, incurred but not reported claims (IBNR) 4,879 Opening balance Cost for claims incurred during the current year Change in estimated cost for claims incurred in previous years (close down profit/loss) Claims handling expense Paid/transferred to insurance liabilities or other current liabilities Currency affect Closing balance Closing balance, reported claims 9,861 3,284 2,732 175 4,240 -380 11,082 4,831 Closing balance, incurred but not reported claims (IBNR) 6,251 Note 26 • Equalisation provision share -852 -3,096 -3,948 -582 -2,013 0 -937 50 -5,556 -1,124 -4,432 4,130 1,783 5,913 2,702 719 175 3,303 -330 5,526 3,707 1,819 share -698 -3,890 -4,588 -563 278 0 -431 494 -3,948 -852 -3,096 4,163 1,756 5,919 3,491 673 168 3,644 -358 5,913 4,130 1,783 4,861 5,646 10,507 4,054 395 168 4,075 -852 9,861 4,982 4,879 Opening balance Change in accounting principles Release of provision made in prior years Provision for the year Closing balance Group Parent Company 2010 2009 2010 2009 0 0 0 0 0 3 -3 0 0 0 3 0 -3 12 12 3 0 0 0 3 64 Annual Report 2010 Note 27 • Claims handling provision Opening balance Release of provisions made in prior years Provisions for the year Currency effect Closing balance Note 28 • Employee benefits Group Parent Company 2010 2009 2010 2009 122 -20 41 -14 129 113 -30 39 0 122 122 -20 41 -14 129 113 -30 39 0 122 Group Parent Company Employee benefits 2010 2009 2010 2009 Pension provision – defined benefit plans Total employee benefits 5 5 -9 -9 9 9 0 0 Specification of provisions for employee benefits A defined benefit plan is a plan which does not comprise a defined contribution plan. In a defined benefit plan, the employer guarantees that the employee will receive a defined amount of benefit upon retirement, usually based on one or more factors, such as age, length of service and salary. The group calculates its provisions and expenses based on the conditions of the gua- ranteed pension obligations, as well as on its own assumptions regarding future development. The provision reported in the balance sheet for defined benefit plans is the present value of the defined benefit obligation at the end of the reporting period, less the fair value of plan assets, adjusted for unrecognised actuarial gains and losses, and unre- cognised service costs related to prior periods. Actuarial gains and losses arise if actual outcome deviates from calculated, defined assumptions, or if there is a change in assumptions. The defined pension obligation is calculated annually by independent actuaries, applying the projected unit credit method. The net present value of the obligation is defined by discounting of esti- mated future cash flows, using the interest rate of high quality mortgage bonds that are emitted in the same currency in which the obligations are to paid, with durations comparable to the duration of the current pension obligation. The group applies the corridor method, implying that actuarial net losses are recorded when the opening balance of actuarial losses exceeds 10% of either the projected benefit obligation or of investment assets. As actuarial net loss amount does not exceed the corridor amount, there is no surplus to report in income or charge against results during the employees’ remaining period of service. The group has defined benefit plans in Sweden and Germany which are based on the employees’ pension entitlements and length of employment. In Germany all employees are included in the plan. In Sweden only employees born 1971 or earlier are covered by defined benefit plans and, thus, form part of the FTP2. Furthermore, there are two variations regarding early retirement. Employees born 1955 and earlier have the possibility to retire between the ages of 62 and 65 according to local agreement. Staff employed before 1 January, 2004 have the right to retire from the age of 64. These plans are also defined benefit plans and are reflected in financial statements of both the Group and the Parent Company. Employees in Sweden born 1972 or later, are covered by a defined contribution plan, FTP1. Employees outside Sweden and Germany are mainly covered by defined contribution plans in which the employer has a responsibi- lity for the employees’ pension. Group Amounts in balance sheet for defined benefit plans 2010 2009 Defined benefit obligations Fair value of plan assets Sub-total Net cumulative unrecognised actuarial losses Provisions for defined benefit plans 59 -53 6 -1 5 41 -50 -9 0 -9 Plans with a net surplus, i.e. where the plan assets’ fair value exceeds pension obligation, are reported as debtors in the balance sheet. The net surplus for 2009 was 9 MSEK. 65 Annual Report 2010 Pension cost recognised in the income statement 2010 2009 Group Current service cost Interest cost Expected return on plan assets Amortisation of actuarial net loss Amortisation of service cost prior year Pension cost for defined benefit plans Paid premiums, defined contribution plans Total pension cost 1) 11 3 -2 0 6 18 44 62 3 2 -1 0 0 4 39 43 1) Tax on pensions, 12 MSEK, is recorded as ”Remuneration to employees” and is included in Note 32. Changes in defined benefit obligations 2010 2009 Group Opening balance pension obligation Current service cost Interest cost, pension obligation Actuarial gains and losses, net Release of obligation by payment Service cost, prior year Exchange differences on foreign plans Closing balance pension obligation 36 3 2 0 1 0 -1 41 41 11 3 1 -1 6 -1 59 Group Changes in plan assets 2010 2009 Opening balance plan assets at fair value Expected return on plan assets Actuarial gains and losses, net Contributions Release of obligation by payment Exchange differences on foreign plans Closing balance plan assets at fair value 50 1 0 5 -1 -2 53 46 1 0 5 -1 -1 50 Plan assets at fair value per 31 December, 2010 exceed the group’s defined benefit obligations. Therefore, no extra funding is required to secure the defined benefit pension obligations. Group Unrecognised actuarial net loss 2010 2009 Opening balance actuarial net losses Defined benefit obligations The period’s experience effect on actuarial net gains (-)/net losses (+) on pension obligations Amortisation of actuarial net gains/losses Plan assets The period’s experience effect on actuarial net gains (-)/net losses (+) on plan assets Amortisation of actuarial net gains/losses Closing balance actuarial net losses 0 1 0 0 0 1 0 0 0 0 0 0 66 Annual Report 2010 Corridor method Opening balance actuarial net losses Corridor amount Gains/losses subject to amortisation Expected remaining service time (years) Amortised actuarial net gains/losses Group 2010 0 5 0 15.7 0 2011 1 5 0 14.9 0 Group 2009 0 5 0 15.0 0 Actuarial assumptions, percentage 2010 2009 Discount rate, 1 January Discount rate, 31 December Expected return on plan assets Expected salary increases, 1 January Expected salary increases, 31 December Indexation of benefits Indexation of income base amount, 1 January Indexation of income base amount, 31 December Staff turnover 5% 5% 3% 3.5% 3.5% 2% 3% 3% 3% 5% 5% 0% 3.5% 3.5% 2% 3% 3% 3% When calculating the expense for defined benefit obligations, assumptions are made regarding the future development of factors which may influence the size of expected payments. The discount rate is the interest rate applied to discount the value of expected payments. This rate is fixed applying a market rate with a remaining duration equivalent to the pension obligations. The group’s applied discount rate, for the Swedish defined obligations, is based on Swedish mortgage bonds. Assets to secure these pension obligations are invested in a variety of financial instru- ments by Skandia Liv. The expected return on plan assets mirrors the expected average yearly return on those financial instruments for the remaining duration. Future annual salary increases reflect expected future salary increases resulting from collective agreements and salary expectations. Final benefits according to FTP are governed by Swedish base income amount (inkomstbasbeloppet). Consequently, there is a requirement to assess future base income amounts. Annual pension increases also need to be considered, as these have historically always taken place. Assumptions about the beneficiaries’ life expectancy comply with FFFS 2007:31 (DUS06) and are updated annually. 67 Annual Report 2010 Note 29 • Other creditors Group Parent Company 2010 2009 2010 2009 Amounts due to group companies Other debtors Total other creditors 1) 519 74 593 543 83 626 539 69 608 560 78 638 1) The majority of the liabilities have a duration less than one year. Note 30 • Contingent liabilities and commitments In the form of pledged assets for own liabilities Group Parent Company and provisions 2010 2009 2010 2009 Bonds and other interest-bearing securities Cash and bank 7,553 115 Assets for which policy holders have preferential rights 7,668 6,482 165 6,647 7,553 115 7,668 6,482 165 6,647 On the basis of the stipulations in Chapter 7, Section 11 of the Insurance Business Act, registered assets amount to MSEK 6,573. In the case of insolvency, the insured has preferential rights to the registered assets. During the course of operations, the Company has the right to register and de-register assets from the register, provided that all insurance commitments are covered by technical provisions in accordance with the Insurance Business Act. Nominal amount 2010 2009 2010 2009 Group Parent Company Future commitments for investments in private equity companies Total Note 31 • Associated parties Summary of transactions with associated parties Associated parties within the White Mountains Group Group and Parent Company 2010 60 60 67 67 60 60 67 67 Services purchased Receivables, Liabilities, Premium from associated associated income, Indemni- associated parties per parties per net fication parties 31 Dec. 31 Dec. Other associated parties White Mountains Re America – assumed reinsurance White Mountains Re America – ceded reinsurance White Mountains Re America – administrative services Esurance – assumed reinsurance WM Life Re – ceded reinsurance White Mountains Re Services – administrative services White Mountains Holding - administrative services White Mountains Re Underwriting Services Ltd. – assumed reinsurance White Mountains Financial Services LLC – financial services Sirius Insurance Holding Sweden AB – group contributions Fund American Holdings AB – group contributions White Mountains Advisors LLC – financial services 512 - 56 0 727 -216 0 0 0 0 0 0 0 - 465 56 0 - 713 1,306 0 0 0 0 0 0 0 Total 967 184 0 0 -1 0 0 -11 -2 0 -17 0 0 -20 -51 819 0 0 181 4,093 1) 0 0 0 0 0 0 0 5,093 0 7 0 0 13 14 0 2 7 323 170 5 541 68 Annual Report 2010 Group and Parent Company 2009 Services purchased Receivables Liabilities, Premium from associated associated income, Indemni- associated parties per parties per net fication parties 31 Dec. 31 Dec. Other associated parties White Mountains Re America – assumed reinsurance Esurance – ceded reinsurance WM Life Re – ceded reinsurance White Mountains Re Services – administrative services White Mountains Re Bermuda Ltd – ceded reinsurance and administrative services White Mountains Re Underwriting Services Ltd. – assumed reinsurance White Mountains Financial Services LLC – financial services Sirius Insurance Holding Sweden AB - group contributions Fund American Holdings AB – group contributions White Mountains Advisors LLC – financial services 376 1,956 -216 -166 - 1,844 -491 0 95 0 0 0 0 0 0 0 0 0 0 0 0 Total 2,211 -2,501 1) Refers to reinsurer’s share of outstanding claims. -1 0 0 -35 0 0 0 0 0 -23 -59 841 498 2,715 1) 0 0 0 713 0 0 0 4,767 3 0 16 16 36 5 0 302 183 6 567 Note 32 • Average number of employees, salaries and other remunerations Average number of employees - Group 2010 2009 Parent Company Germany Total Men Women Total 132 5 137 142 7 149 274 12 286 Men 123 4 127 Women Total 127 7 134 250 11 261 Average number of employees – Parent Company 2010 2009 Men Women Total Men Women Total 63 23 24 4 5 5 8 70 19 20 5 10 7 11 133 42 44 9 15 12 19 59 23 24 4 5 3 5 70 18 20 4 9 1 5 129 41 44 8 14 4 10 132 142 274 123 127 250 Sweden UK Belgium Switzerland Singapore Denmark Bermuda 1) Total Senior management in the Group and Parent Company 2010 2009 Men Women Total Men Women Total Board and CEO Other senior members of management Total 3 3 6 1 0 1 4 3 7 4 3 7 0 0 0 4 3 7 1) Average number of employees in Bermuda for 2009 only refers to the period 1 September, 2009 – 31 December, 2009. 69 Annual Report 2010 Remunerations to employees Group Parent Company 2010 2009 2010 2009 Salaries including bonuses 273 244 261 232 Of which expenses bonus and other similar remunerations Pension expenses - Defined contribution plans - Defined benefit plans (Note 28) Social security contributions, special employer’s contributions on pensions Total Of which paid remunerations for the year to: 80 62 43 19 76 411 34 43 39 4 65 352 77 56 43 13 76 393 32 43 39 4 65 340 Group Parent Company CEO 2010 2009 2010 2009 Salaries including bonuses Of which paid out bonuses Pension expenses - Defined contribution plans - Defined benefit plans Total Board and other senior members of management Salaries including bonuses Of which expenses bonus and other similar remunerations Pension expenses - Defined contribution plans - Defined benefit plans Total 12 8 3 3 0 15 12 7 3 3 0 15 8 4 3 3 0 11 10 5 2 2 0 12 12 8 3 3 0 15 12 7 3 3 0 15 8 4 3 3 0 11 10 5 2 2 0 12 Salaries and other remunerations, 2010 2009 divided by country - Group Of which Of which Of which Of which expensed bonuses bonuses expensed bonuses bonuses Salaries and and other paid for Salaries and and other paid for remuneration remunerations the year remuneration remunerations the year Parent company Germany Total 261 12 273 77 3 80 85 3 88 232 12 244 Salaries and other remunerations, 2010 divided by country - Group 32 2 34 60 4 64 2009 Of which Of which Of which Of which expensed bonuses bonuses expensed bonuses bonuses Salaries and and other paid for Salaries and and other paid for remuneration remunerations the year remuneration remunerations the year Sweden UK Belgium Switzerland Singapore Denmark Bermuda (1 Sep – 31 Dec, 2009) Total 120 32 42 16 9 4 38 261 37 3 15 7 1 0 14 77 33 2 16 5 2 0 27 85 113 34 45 15 9 3 13 232 34 3 16 5 2 0 0 60 17 1 10 3 1 0 0 32 70 Annual Report 2010 Salaries and remuneration The Board receives remunerations in accordance with the reso- lutions of the Annual General Meeting. Board fees are not paid to individuals employed in the company. No Board fees were paid in 2009 and 2010. Remuneration to the CEO and other senior mem- bers of management consists of basic salary, bonuses and other compensations such as car benefits and pensions. variable remuneration The Annual General Meeting has resolved upon a variable remunera- tion plan for the CEO and senior members of management. Other employees are also covered under a variable remuneration plan. Levels of variable remuneration are based upon the Group’s profit/ loss as well as individually set goals. Remuneration policy Sirius International’s remuneration policy is available on the Company’s homepage, which follows FFFS 2009:7. Pensions Sweden: Sirius applies the pension agreement signed with FAO/ FTF/Saco. The agreement came into effect as of 1 January, 2008 and implies that employees born 1971 and earlier have a benefit defined pension plan, whereas employees born 1979 and earlier are offered a premium defined solution. The pension benefits are safeguarded by insurance. Employees born 1955 and earlier has the benefit of entering into retirement between 62 and 65 years of age according to collective agreements. Employees starting at Sirius International prior to 1 January, 2004 have a retirement age of 64. The Company’s CEO has a premium based executive pension plan. Three additional senior members of management subscribe to special premium based pension plans. Both plans are safeguarded by insurance. The Company’s CEO has the right of receiving a lifelong pension as of 65 years of age. UK: The pension plan covers all employees over 21 years of age and who are employed with conditional tenure. The plan is premium based. The employee pays 1.5 percent or more of his/her salary and Sirius pays 12 percent of the employee’s salary. In terms of salary, no upper limit exists. The money is invested in funds of the employee’s choosing. The plan is optional and employees may choose not to participate. Belgium: All employees are covered by a pension plan in which Sirius pays 4.5 percent or 6.5 percent of the salary, depending on the employee category. The employee pays 2 percent. Pos- sible changes to the plan must be approved by local unions. The premiums are invested by an insurance company and the employee cannot influence how the money is invested. At the time of retire- ment, the employee has the option of either receiving the money as a lump sum or as a series of payments over time. Germany: Employees are covered by a defined benefit pension plan. The plan is funded by the company. The pension receivables are reported as liabilities on the balance sheet. Switzerland: Employees are covered by pension plans according to the industrial sector to which they belong. The plan is a combina- tion of a defined benefit and fee based pension plan. Sirius pays for 60 percent of the premiums while the employee pays for the remaining 40 percent. Singapore: The Company is not required to pay pensions. Denmark: All employees are covered by a mandatory pension plan with Danica pension. Sirius pays the agreed upon percentage rate stated in the employee´s employment contract, however, this percentage shall be at a minimum, 15 % of the employee´s salary. Thereafter, this amount is distributed to cover other aspects such as life insurance and disability benefits. Bermuda: All employees are covered by the pension plan applied. The plan is premium based. The company pays 10% of the employee's income in accordance with The National Pension Scheme Act. Severance pay Upon termination initiated by the Company, the CEO is entitled to severance pay during the termination period of 12 months. A 6 month termination period is required if termination is initiated by the CEO. Drafting and decision-making process Decisions regarding remuneration for the CEO are resolved upon by the Board. Decisions regarding remuneration for other senior members of management are made by the CEO, in some cases after consultation with the Chairman of the Board. Loans to senior members of management – none. Absence due to illness in the Parent Company 2010 2009 Total absence due to illness as a percentage of ordinary working hours 2.56% 2.49% Share of total absence due to illness regarding continuous absence due to illness of 60 days or more 43.26% 40.00% Absence due to illness as a proportion of each group’s standard working hours Absence due to illness divided by gender: Men Women Absence due to illness divided by age category: Younger than 30 years 30-49 years 50 years and older 2.04% 3.03% 1.17% 2.60% 2.57% 2.66% 2.35% 1.55% 3.09% 1.83% 71 Annual Report 2010 Note 33 • Fees and reimbursement to auditors Group Parent Company Öhrlings PriceWaterhouseCoopers (PWC) 2010 2009 2010 2009 Audit services Tax counselling Total 4 1 5 4 0 4 4 1 5 4 0 4 Audit assignment refers to the examination of the annual report and accounting records, as well as the administration of the Board of Directors and CEO, other duties which are the responsibility of the Company’s auditors to execute and the provision of advisory services or other assistance resulting from observations made during such an examination or the implementation of such other duties. Other services than those included in the audit agreement are classified as audit services in addition to audit agreement, tax counselling and other services. Note 34 • Operational leasing Leasing contracts in which the Company is the lessee Group Parent Company 2009 2008 2009 2008 Non-cancellable leases amount to: Due for payment within one year Due for payment later than one year but within five years Due for payment after five years Total 32 40 7 79 33 54 9 96 31 35 7 73 31 48 8 87 Note 35 • Class analysis Profit/loss per insurance class 2010 Parent Company Personal Marine, Fire and other accident and aviation and property Credit Total direct Assumed health transport damage insurance Miscellaneous insurance reinsurance Total Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance Equalisation provision Technical result 637 630 -337 -277 -17 0 -1 57 55 -17 -24 -5 0 9 2009 Parent Company Personal Marine, 89 79 -33 -39 0 0 7 Fire and other 0 0 -2 0 0 0 -2 96 86 -31 -31 -1 3 26 879 850 -420 -371 -23 3 39 6,516 6,591 -5,596 -1,589 1,192 -12 586 7,395 7,441 -6,016 -1,960 1,169 -9 625 accident and aviation and property Credit Total direct Assumed health transport damage insurance Miscellaneous insurance reinsurance Total Premium income, gross Premium earned, gross Incurred claims, gross Operating expenses, gross Result, ceded reinsurance Equalisation provision Technical result 640 645 -349 -267 -7 0 22 28 20 -72 -11 -4 0 -67 61 59 -29 -35 0 0 -5 1 1 0 0 0 0 1 90 89 -44 -41 0 0 4 820 814 -494 -354 -11 0 -45 7,810 7,579 -3,955 -1,658 -979 0 987 8,630 8,393 -4,449 -2,012 -990 0 942 72 Annual Report 2010 Note 36 • Transition to IFRS Listed companies within the EU were required to adopt International Financial Reporting Standards (IFRS) for consolidated accounts as of 2005. Finansinspektionen (the Swedish Financial Supervisory Authority) requested, instead, that companies under the supervision of Finansinspektionen adopt legally restricted IFRS (IFRS as restric- ted by Swedish legislation) in both the parent company- and group accounts as of 1 January, 2007. Furthermore, as of 1 January, 2010 all companies under the supervision of Finansinspektionen are obliged to adopt IFRS in their consolidated accounts. Sirius International’s consolidated accounts have therefore been prepared according to IFRS as of 1 January, 2010. A company adopting IFRS for the first time shall comply with IFRS 1 “First time adoption of International Financial Reporting Standards”. Sirius adopts IFRS in its group accounts retroactively and has prepared opening balances per 1 January, 2009.This also implies that all comparative figures have been reported according to the new accounting principles. Sirius’ consolidated accounts are, therefore, adapted to IFRS as of 1 January, 2010. As the Sirius Group has, in prior years, prepared its consolidated accounts according to legally restricted IFRS, the differences with IFRS are limited. The differences are described in the text below and in the following tables. IAS1 Presentation of financial statements The Sirius Group implements limited changes in its presentation of financial statements in the transition to IFRS. One change is that Sirius Group presents, as of 2010, an income statement in two sec- tions; one income statement and one statement of comprehensive income. The later shows changes in shareholders’ equity which do not refer to owner-related transactions. The change in presentation is also adopted in the accounts of the parent company as this type of presentation of financial statements is also required according to legally restricted IFRS. Effect on net income for the year of transition to IFRS IAS19 Employee benefits Employee benefits are to be accounted for according to IAS 19, which stipulates that the value of defined benefit plans should usually be measured, and subsequently accounted for in the balance sheet. The reported expense does not necessarily need to correspond with the payments made in the period. The obligation in the balance sheet regarding defined benefit plans refer to the net present value of the defined benefit obligation at the end of the reporting period, less the fair value of the plan assets, with adjust- ment for unrecognised actuarial gains and losses and unrecognised service costs related to prior periods. Within Sirius Group the defined benefit obligation is annually calculated by independent actuaries who apply the so called pro- jected unit credit method. The net present value of the obligation is defined by discounting the estimated future cash flows, applying the interest rate of high quality mortgage bonds are issued in the same currency in which the obligations are to be settled, with durations comparable to the duration of the current pension obligation. IAS27 Consolidated and separate financial state- ments Sirius International applies IFRS 1, which states that IAS 27 must be adopted prospectively as of the comparative year, i.e. 1 January, 2009. IFRS3 Business combinations Goodwill arising from a business acquisition must be accounted for in accordance with IFRS 3, which implies that depreciation ac- cording to plan on goodwill is not to be recorded. Impairment test, shall, instead, be performed. The tables below illustrate the transition’s impact on the balance sheet and the income statement. The effects on the balance sheet are recorded as accumulative figures. Net income for the year according to legally restricted IFRS Effect on net income for the year of transition to IFRS A, B Net income for the year according to IFRS Effect on income statement of transition to IFRS Operating costs Depreciation, goodwill Effect on income statement of transition to IFRS A B Jan-Dec 2009 1,275 27 1,302 Jan-Dec 2009 0 27 27 73 Annual Report 2010 Effect on balance sheet of transition to IFRS 1 January, 2009 31 December, 2009 Assets according to legally restricted IFRS 24,843 26,282 Intangible assets Debtors Assets according to IFRS B A Shareholders’ equity and liabilities according to legally restricted IFRS Shareholders’ equity Other creditors Shareholders’ equity and liabilities according to IFRS 0 8 27 -6 24,851 26,303 24,843 6 2 24,851 26 282 33 -14 26,303 Effect on shareholders’ equity of transition to IFRS 1 January, 2009 31 December, 2009 Shareholders’ equity and liabilities according to legally restricted IFRS Retained earnings, including net income for the year – non-restricted A, B Shareholders’ equity according to IFRS 8,017 6 8,023 9,945 33 9,978 A: Pensions have a transition effect of MSEK 6 on shareholders’ equity per 1 January, 2009 which is accounted for as an increase in pension assets on the line item, Debtors. In addition, a deferred tax liability is recorded in the pension obligation. The transition to IFRS for the period 1 January, 2009 to 31 December, 2009 results in an income of MSEK 1. The accumulative impact on shareholders’ equity sums up to MSEK 9. Furthermore, assets and obligations referring to defined benefit plans in Sirius International’s subsidiary, Sirius Rück, are presented net in the balance sheet. Previously, these pension plans have been presented gross in the balance sheet. This change reduces the group’s total assets by MSEK 15. B: As IFRS stipulates that the group can no longer depreciate goodwill but, instead, should perform impair- ment tests, the group’s intangible assets have been adjusted. This had a positive impact on net income for the year, MSEK 27, for the period 1 January, 2009 to 31 December, 2009. 74 Annual Report 2010 Stockholm, 4 March, 2011 Allan Waters Chairman of the Board of Directors Brian Kensil Göran Thorstensson President & CEO Jan Silverudd Employee Representative Our Auditors’ Report was submitted on 4 March, 2011 Catarina Ericsson Authorized Public Accountant Anna Hesselman Authorized Public Accountant 75 Annual Report 2010 Audit Report To the general meeting of the share- presentation of information in the annual ac- holders of Sirius International Insurance counts and consolidated accounts. As a basis for Corporation (publ) Cor porate identity number 516401-8136. our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances if the company in order to We have audited the annual accounts, the be able to determine the liability, if any, to the consolidated accounts, the accounting records company of any board member or the managing and the administration of the board of directors director. We also examined whether any board and the managing director of Sirius Interna- member or the managing director has, in any tional Insurance Corporation (publ) for the other way, acted in contravention of the Insur- year 2010. These accounts and the administra- ance Business Act, the Annual Accounts Act tion of the company and the application of the for Insurance Companies or the Articles of Annual Accounts Act for Insurance Companies Association. when preparing the annual accounts as well We believe that our audit provides a rea- as the application of the International Finan- sonable basis for our opinion set out below. cial Reporting Standards (IFRS) as adopted by The annual accounts and the consolidated ac- EU and the Annual Accounts Act for Insurance counts have been prepared in accordance with Companies when preparing the consolidated the Annual Accounts Act for Insurance Compa- accounts, are the responsibility of the board nies and give a true and fair view of the com- of directors and the managing director. Our pany’s and the group’s financial position and re- responsibility is to express an opinion on the sults of operations in accordance with generally annual accounts, the consolidated accounts and accepted accounting principles in Sweden. The the administration based on our audit. consolidated accounts have been prepared in We conducted our audit in accordance accordance with IFRS as adopted by the EU and with generally accepted auditing standards in in accordance with the Annual Accounts Act for Sweden. Those standards require that we plan Insurance Companies and provide a true and and perform the audit to obtain high but not fair view of the Group’s financial position and absolute assurance that the annual accounts results of the operations. The statutory admin- and the consolidated accounts are free of mate- istration report is consistent with the other rial misstatement. An audit includes examin- parts of the annual accounts and consolidated ing, on a test basis, evidence supporting the accounts. amounts and disclosures in the accounts. An We recommend to the general meeting of audit also includes assessing the accounting shareholders that the income statement and bal- principles used and their application by the ance sheet for the company and the group be board of directors and the managing director adopted, that the profit be dealt with in accord- and significant estimates made by the board ance with the proposal in the administration of directors and the managing director when report and that the members of the board of di- preparing the annual accounts and the consoli- rectors and the managing director be discharged dated accounts as well as evaluating the overall from liability for the financial year. S t o c k h o l m , 4 March, 2011 Catarina Ericsson Authorized Public Accountant Anna Hesselman Authorized Public Accountant 76 Annual Report 2010 DEFINITIONS Combined Ratio Net claims incurred in relation to net premiums earned and operating expenses (both commissions and own expenses) in relation to net premiums earned. Net Technical Provisions Total technical provisions (premium & claims provisions) less reinsurers’ share of technical provisions. Solvency Capital Total of shareholders’ equity + deferred taxes (or untaxed reserves in the parent company) + excess values of investment assets. Solvency Ratio Solvency capital in relation to net premium income. This is an unaudited translation of Sirius International Annual Report 2010. The audited Swedish version is the binding version. 77 Annual Report 2010 78 Annual Report 2010 Sirius was founded in 1945 as a captive by the Swedish industrial group Axel Johnson. Initially the company insured only Johnson fleet vessels and reinsured at Lloyd’s. Over time, Sirius moved into third party business and during the 1970s a global assumed reinsurance account was developed. By 1978 Sirius had become one of the largest reinsurance companies in Sweden with premiums of about $40 million. In 1985, the Johnson group ran into financial difficulties and reluctantly sold Sirius to the Swedish industrial group ASEA, later to become ABB. Premium volume was now around $180 million, nearly all written on a proportional basis. In 1990 Göran Thorstensson became CEO of Sirius. The company added non-proportional busi- ness and improved profitability. Sirius gradually emerged as a leading excess of loss reinsurer. By 2000, Sirius was the only major Nordic reinsurer. Merely 15 years earlier, some 35-40 Nordic companies were writing assumed reinsurance accounts; alas, without sustainable results. In 2004, history then repeated itself as Sirius’ second owner also ran into financial difficulties, enabling White Mountains to acquire Sirius for $428 million and record a gain of $111 million. A combination of strong underwriting controls and uniquely experienced management – most of the team has been with the company for more than 20 years – has allowed Sirius to outperform the reinsurance industry over an extended period. Nearly all of Sirius’ customers have been business partners for a long time, many for more than 40 years. The company’s philosophy has always been to write for profit only – every company says so but few walk the walk. Management has no volume targets, avoids legacy problems by maintaining a strong balance sheet, and always sticks to what it knows. Since the acquisition by White Mountains, Sirius has an average combined ratio of 88% and cumulative underwriting profits in excess of $500 million. This long-term track record is perhaps unparalleled. 79 Annual Report 2010 Art and production: Studio Ringvall 80 

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